May 1999

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 27 -- June 7, 1999
In this digest:

1. STOCK REPORT: Revenue warnings hammer MKS, Descartes
2. O'Donovan steps down as Com Dev CEO
3. Open Text withdraws PC DOCS bid after Hummingbird sweetens
4. Delayed sales lead to US$8 million loss for Descartes
5. Preliminary results show big revenue drop at MKS

6. Virtek Q1 revenues climb 54%
7. New pager, new services for RIM
8. NBTel contract is PixStream's biggest yet
9. More of the same in DALSA's Q1
10. CME Telemetrix burns through cash in Q1

11. Finline left with bleak balance sheet as revenues no-show
12. GUARD continues with projects; has sufficient funds for 1999
13. It's list season again

STOCK REPORT: Revenue warnings hammer MKS, Descartes
May 1999

Both Descartes and MKS issued warnings during the month, causing both companies' shares to be hit hard. Descartes dropped 26% in May, closing the month at $6.90 -- below their original offering price of $7.00 in January 1998. Descartes shares had also dropped 25% the previous month.

MKS shares fell 25% to close the month at $5.00. It was their fourth consecutive month of double-digit percentage declines after a very successful January. Other than a one-shot trade made at $4.00 last Christmas Eve, MKS shares spent the latter part of the month at their all-time lowest levels.

Open Text shares also had a weak month after a terrific March and April. They were down 19% to $46.50 on the TSE. Trading had been even lower, but the shares gained $4.50 over the last two days in May.

But things weren't all bad for CTT tech companies. RIM had another good month, up 15% to $20.30. Their shares have now almost doubled in value in 1999.

DALSA also received a positive market response to their latest quarter, with a 22% jump to $12.20 -- only their second monthly gain in the last year.

RIM, Descartes, and Com Dev have all started June strongly over the first four days of trading. We'll see if they're able to sustain that momentum in the next Digest.

O'Donovan steps down as Com Dev CEO
June 3, 1999

Val O'Donovan has resigned as Com Dev's CEO, and has been succeeded by Keith Ainsworth, the company's president. O'Donovan co-founded Com Dev in 1974, and Ainsworth joined the firm the following year. Ainsworth has been president since 1990.

O'Donovan, 63, will continue in his role as chairman. He will also continue to serve as UW's chancellor for another four years.

Com Dev also announced this month that Hughes Space and Communications has agreed to a three-year renewal of a long-term purchasing agreement with the company. Hughes is a long-standing Com Dev customer. Com Dev also announced an agreement with the European Space Agency valued at $835,000.

Open Text withdraws PC DOCS bid after Hummingbird sweetens
May 13, 1999

PC DOCS had no vitriolic rejections for Open Text after all. They didn't even need to reject Open Text's offer, as it was withdrawn after Hummingbird sweetened their offer for PC DOCS to $11 cash per share (compared to Open Text's offer of $8.50), or about $305 million.

Open Text attributed their withdrawal to their inability to get access to non-public information about PC DOCS that had been supplied to Hummingbird.

In other news from Open Text during May, they announced Livelink deals with SGI, two divisions of H-P, and Eastman Chemical.

Delayed sales lead to US$8 million loss for Descartes
May 26, 1999

For the three months ended April 30 (Q1 00), Descartes lost US$7.8 million (US$0.21/share) on revenues of US$11.3 million. Revenues were significantly below expectations and down from US$14.8 million in the previous quarter. Descartes issued a warning on May 5, and reported the results for the quarter on May 26.

The results were described as a "one-time aberration" by CEO Peter Schwartz who attributed the revenue shortfall to delays in closing two major deals which, because of their size, had experienced more complex decision cycles than Descartes' traditional transactions. According to Schwartz, had either deal closed, the company would have hit their revenue targets for the quarter. A third expected sale, one of lesser value but still described as "seven figures" also did not close during the quarter.

Descartes' average deal size has been growing with the inclusion of their DeliveryNet.com enterprise architecture, and the company seems to expect million-dollar deals to be the norm with their current offerings. The largest deal that actually closed during Q1 was US$650,000.

With the expectation that at least one of these deals would close, Descartes chose to make some one-time sales & marketing expenditures during the quarter, and these ended up inflating a weak bottom line. Quarterly sales and marketing expenses of US$6.2 million were 135% above the same period last year and 32% above the previous quarter.

Quarterly software licensing revenue was down 22% from the same period last year, while services revenues jumped 67%. There was a complete shift in the make up of Descartes' quarterly revenue, with just over half coming from services, with licensing accounting for only one-third. This was a complete reversal from the previous quarter where licensing was 51% of revenue and services 37%. With the shift to services, gross margins plummeted to 33% from 50% a year ago and 59% in the previous quarter.

The company says they still expect to make their revenue and income targets for the year and that their sales force has been energized by the larger deal sized now achievable with DeliveryNet.com.

The Globe reported that Thomas Berquist, analyst with U.S. Bancorp Piper Jaffrey, has a pessimistic 12-month target price of US$4 for Descartes. Barry Richards of Sprott has a more reasonable target of C$10.

You may have seen a story in the Globe about the pay raise given to Peter Schwartz last year. They reported that Schwartz received a 59% raise in his base salary fiscal 1999, which is how the company reported it after translating pay figures into US dollars. In Canadian dollars, however, it seems his salary raise was actually 72% -- from about $175,000 in FY98 to just over $300,000 in FY99. With bonuses, his total compensation, excluding options, was more than $400,000. (RIM co-CEO Jim Balsillie is a Descartes director on their compensation committee. It'll be interesting to see if his salary shows a similar jump since RIM had an even better year than Descartes, and Balsillie's last reported total annual compensation was "only" $200,000).

Options were another interesting story at Descartes. A year ago, the company had to seek approval from shareholders to beef up what had been a woefully deficient stock option plan and take it to industry standards. Among shareholders, there was some debate and dissention about the proposal, but they did approve the plan after the usual talk about how important options are to attract and retain talent and so forth.

Descartes reports that in FY99 their six executive officers received almost half (49%) of all options issued. Presumably, the company's other 470 employees got to split the remaining 51% in some proportion. I don't know how that distribution compares to other companies.

Staying with Descartes, their annual report provided more details about the huge asset write-offs made in Q3. The write-offs were of assets acquired from Michael Mead & Associates (MMA) and Roadshow. In both cases, Descartes' needs grew beyond what the acquired technology could provide. The MMA product was suitable for bakeries but "did not sufficiently address perishables industry requirements" and US$4.9 million was written off. The Roadshow technology was a one-business application when Descartes was moving into inter-enterprise applications. Descartes wrote off the US$11.6 million carried on the books for the Roadshow assets.

Preliminary results show big revenue drop at MKS
May 18, 1999

MKS' Q4 is traditionally their strongest quarter, but the company has warned this will be far from the case this year. For the quarter ended April 30, MKS expects revenues will only be $10.7 million -- well below expectations of about $15 million. Net loss is expected to be up to $4.7 million ($0.29/share). A profit of about $1 million had been forecast by analysts, according to the Globe. Complete results will be announced on Wednesday.

"We experienced sales execution challenges," said CEO Randall Howard in a release. The Toronto Star published a sure-to-be-company-pleasing account of MKS' poor quarter, attributing the declines to recent high growth, but perhaps a more cogent analysis appeared in The Record, where Duncan Stewart of the Navigator Canadian Technology Fund told Mike Strathdee that MKS had restructured their salesforce compensation plan mid-year and lost some experienced salespeople. This, coupled with a new competitive product from Merant (the former Intersolv product; Merant -- formerly Micro Focus -- has been having a lot of problems of their own recently), made sales much harder to win during the quarter.

Even with the poor Q4, MKS revenues in FY99 will still be about $50.7 million. Annual growth rate will be around 37%, just a little below last year's 39%. They will be reporting a net loss for the year, even excluding acquisition-related charges. More details next month.

Virtek Q1 revenues climb 54%
May 27, 1999

It wasn't all bad news this month. For the quarter ended April 30 (Q1 00), Virtek reports strong revenues of $3.4 million, up 54% from the same period last year. Net income was $236,000 ($0.02/share). The company has set a target of 50% revenue growth this year.

General & administrative expenses climbed 57% from a year ago and 44% from the previous quarter, and sales & marketing expenses also grew. R&D spending was 19% of revenues this quarter, which is higher than the company has forecast for the remainder of the year.

Inventory levels continued to climb, up 22% to $2.0 million. Virtek burned through nearly a half-million dollars in cash during the quarter. The balance sheet shows $920,000 in cash at the end of the quarter and net working capital of $4.2 million.

Sales of their new ChipReader product are expected to begin in Q2.

Virtek's annual report has the theme "Do something great." CEO Jim Crocker says the company made excellent progress last year, "but are net yet approaching anything close to what is possible." They forecast increasing profits throughout FY00 and mention plans to open a new facility this summer. The company is installing various modules of an ERP system this year and they also seem pretty gung-ho on the use of EVA (economic value added) measuring tools.

New pager, new services for RIM
May 1999

RIM introduced their Inter@ctive Pager 850 this month -- it's physically identical to the 950 but works with American Mobile's ARDIS network in the U.S. The pager and American Mobile's new eLink wireless email service will be sold across the U.S. through SkyTel.

Two companies announced this month that they are making personalized Web content available through the RIM pager. California-based WolfeTech has introduced their PocketGenie service for Blackberry, providing access to over 150 different Web services and containing a text-based Web browser that can view any Web site by typing in the URL.

GoAmerica Communications of New Jersey has introduced their Go.Web service for Blackberry, which will also provide a wide range of Internet content to the RIM device.

PageMart Canada announced this month that they will provide paging services to Blackberry customers, allowing people without email to send messages to Blackberry devices through traditional telephone paging systems.

NBTel contract is PixStream's biggest yet
May 4, 1999

PixStream's video networking platform will be used by NBTel as part of their system offering cable TV-like services over phone lines using ADSL technology.

According to the release, PixStream had been working on technical trials with NBTel, iMagicTV, Newbridge, and other partners since October. The service is expected to be deployed later this year.

It's PixStream's biggest contact to date, said to be worth at least $2 million to the company this year.

Mike Strathdee reports in The Record that PixStream expects to hire an additional 20 people this year, bringing their workforce to 100. They hope to have annual revenues of $20 within two years. PixStream is also involved in trials with Britain's Kingston Vision and with an unnamed Canadian telco.

More of the same in DALSA's Q1
May 4, 1999

For the quarter ended March 31, DALSA reports revenues of $7.2 million and net income of $1.1 million ($0.20/share). The company's numbers have been pretty consistent over the last four quarters, with revenues of $7.x million and net income between $1.0 and $1.2 million each quarter.

Revenues climbed 10% from the same period last year, with almost all gains coming from contracts while product sales remained stagnant. Revenues were lower than in DALSA's last three quarters, but the company has always referred to Q1 as their traditionally weakest quarter.

DALSA is again making references to the possibility of acquisitions. Their balance sheet at quarter's end shows $19.8 million in cash and net working capital of $24.3 million.

CME Telemetrix burns through cash in Q1
May 27, 1999

Financial results for the final quarter for CME Telemetrix that included their Advantage Medical Division shows a company that was continuing to use up cash at an alarming rate. For the three months ended March 31 (Q1 99), CME lost $1.1 million ($0.16/share) on revenues of $172,000.

After the close of the quarter, the company received $2.5 million from the sale of Advantage Medical which, along with monies raised through a warrant offering, added $2.9 million to CME's emaciated cash holdings, which were at $772,000 at the end of the quarter (a decrease of $1.4 million over the quarter).

"Selling the assets of the Advantage Medical Division will immediately add to our cash resources and reduce our cash burn," said CEO Duncan McIntyre in a release.

CME's information circular reports that new CEO McIntyre was to receive a $100,000 bonus if Advantage was sold for $5 million or more, which may be why it's always reported as a $5 million sale (it was actually $5 million over two years, minus unspecified adjustments, which I guess they decided was close enough). The circular also reports that Aidan Furlong, who resigned as CEO last October, will continue to receive his salary until the end of February 2000.

Finline left with bleak balance sheet as revenues no-show
May 1999

The oddest story of the month -- and maybe in the history of the Digest -- sees Finline's credibility take a hit as the big revenue gains they consistently said were coming all year never materialized. In February 1998, Finline announced what was purportedly a big deal with Richardson Electronics -- said to be worth millions of dollars to Finline in FY98. Even when the monies didn't appear over the first three quarters of the year, Finline announced we should see it show up in Q4.

Not only didn't any money appear in Q4, the company completely repudiated all of their previously announced results for 1998. With no explanation whatsoever, the company is now reporting that for the year they lost $1.1 million ($0.19/share) on revenues of only $618,000. Finline had previously reported revenues of $808,182 over the first three quarters of 1998.

If the year-end numbers are to be believed, the company's gross margins for the year were just 5% for minuscule gross profits of $31,832.

The balance sheet shows no cash and just $7,000 in accounts receivable. Current liabilities are listed as $1.1 million, including $404,000 in shareholder loans, repayable at rates between 8% and 30%.

Finline also reports they are "currently disputing claims by certain service providers against the company for unpaid invoices." They also said say they hope to issue shares in exchange for some of their debt.

The company also reported this month that they want to raise up to $450,000 through a private placement of shares. Finline unsuccessfully attempted two warrant offerings in 1998.

GUARD continues with projects; has sufficient funds for 1999
May 1999

GUARD continues to finance Nanodesign and five other development projects, all in prerevenue stages. For 1998, GUARD lost $4.8 million on interest revenues of $165,000, and in Q1 99, ended March 31, GUARD reports a loss of $1.2 million. Accumulated deficit now stands at $8.8 million.

The balance sheet at March 31 shows $3.8 million in cash, which the company says is enough to carry them into 2000. According to their annual report, GUARD's focus in 1999 is on creating revenues, developing alliances and finding co-investors for existing projects.

GUARD subsidiary Nanodesign has completed the design and synthesis of compounds now undergoing testing to evaluate their anti-cancer potential. They are currently negotiating R&D alliances with multinational pharmaceutical companies that will provide the external financing required to grow the company.

It's list season again
May 1999

Spring is list season, and a couple notable lists of dubious value were released this month. This year, Virtek made its fifth and final appearance on the Profit 100, and is a perfect example of why the Profit list can't always be taken too seriously. The company makes its farewell appearance at a time when their future hasn't looked brighter, while for much of the time Virtek was included on the Profit 100 they were "on [their] way out of business," to quote CEO Jim Crocker from the magazine.

Virtek took 4th place on this year's list, while Open Text was #32 and RIM made its Profit 100 debut at #38. Mississauga's The Laser Center took top spot, growing from $1.2 million in revenue in 1993 to $259.7 million in 1998 -- a 22,194% jump.

Last year, Canadian Business introduced their "Technology 100" list of the top 100 Canadian high-tech companies by revenue. It was a welcomed addition, even if they did accidentally overlook Cognos and Open Text. This year's list isn't anywhere near as useful. Instead of using the four most recently reported quarters, this year they used the last reported fiscal year. This means that the revenue numbers used for RIM, for example, are mostly from 1997, which is not of much relevance today.

The people at Descartes were undoubtedly surprised to read that their revenue growth in FY99 was -0.9% (it was actually +112%), but this pales next to what he folks at Cygnal Technologies must have thought seeing their 1998 growth rate listed as -100%! Who knows how many other numbers may be inaccurate.

Making the list from CTT are: Com Dev (31), Descartes (55), Open Text (59), RIM (79 -- would have been 56 with current numbers) and MKS (84 -- would be 64 using FY99 revenues). BCE edged out Nortel for top spot.