Israeli Software Roundup: Silicom, Ness, Blue Phoenix

 |  Includes: MDSY, NSTC, SILC
by: Shlomo Greenberg

IDC, the leading research and forecasting group, believes the WAN optimization market (products that streamline information flow by regulating and prioritizing traffic from the router through the network to the end customer) is expanding rapidly. The current leader in this field is a small company in Cupertino called Packeteer Inc. (PKTR). Packeteer has annual sales of $136 million and profit of $13 million. It currently controls 36% of the global market, with Cisco Systems Inc. (NASDAQ:CSCO) in distant second with 6% and Nortel Networks (NT) in third with less than 5%.

Another player now trying to get a foothold in this arena is Kfar Saba-based Silicom Ltd. (NASDAQ:SILC), which I have followed from time immemorial and which emerged from the darkness thanks to the phenomenal talent of its management team. The company announced on Monday that it has secured two new design wins for its bypasses. These products literally create bypasses to help information circumvent any blockage on networks that may be preventing normal transmission.

Silicom manufactures high-power adaptors, its claim to fame. The company asserts that it has been selected as the preferred manufacturer in the growing bypass market. All that remains is to wish this excellent team the best of luck because they deserve it. Who knows? The stock might even make it back to the March 2000 high of $23. And why not? At least they have a good product this time around whereas back then they hardly had anything.

Ness Technologies (NASDAQ:NSTC) is a company that knows which way it's going, both on Main Street, where it is expanding its global reach, and on Wall Street, where its stock had been making good progress until last week's hiccup. The stock fell apparently in response to the company’s announcement on Monday that it had acquired Selesta Espana S.A.U., a privately held IT software distribution and systems integration company based in Spain. I noticed later on that investment bank Susquehanna Financial Group downgraded its rating for Ness in view of its strong climb up to Monday. In my view, downgrading a company just as it is in the middle of a business upswing amounts to idiocy, but that’s what happened. Wall Street analysts have their own rules.

The deal itself looks excellent. While I don’t have any figures for Selesta Espana, the price Ness will pay for it, €10 million in all, certainly shouldn’t be a strain on the Israeli company. Of this sum, Ness will pay €6.25 million in cash with a further €3.75 million to be paid over the next two years based on the achievement of certain performance goals. Ness has almost $50 million in cash, so why all the panic? The Spanish company, which has a reputable customer base, both public and private, in Spain and Portugal, will open doors for Ness in Spanish-speaking countries, and this amounts to considerable potential. I am due to meet with Ness’s CEO soon so perhaps he will be able to throw some light on all this.

Several months back I wrote about the extremely positive vibes that I have been getting about Blue Phoenix Solutions Ltd. (BPHX), and these are still coming in. On Monday, investment house Roth Capital Partners, which has been covering small Israeli companies for some time, rated the company “Buy.” In their review, analysts Nathan Schneiderman and Nick Pajwani based their rating on Blue Phoenix’s recent successful acquisition of U.K. company Code Stream. They claim this acquisition is highly suited to Blue Phoenix’s activity and will enable it to continue the momentum it recently began. Schneiderman and Pajwani raised their target price for the company to $7.50 from $7.00.

Blue Phoenix has gained 57% since the beginning of the year and enjoyed a surge last week, apparently in response to Roth Capital’s review. In a nutshell, the company develops solutions that enable companies to automate the process of modernizing and upgrading their existing mainframe and distributed IT infrastructure. Blue Phoenix is headed by Arik Kilman, who was appointed in 2001 when the company was founded and remained CEO following the merger with Crystal in 2003. All the signs are that he is the one behind Blue Phoenix’s successful development.

To be honest, there are a lot of Israeli software upgrade and harmonization companies about, and this is one area in which I must confess my ignorance. But associates in the U.S. have advised me to take a look at this company, and I am very happy to do just that. Blue Phoenix does indeed look like it’s going places, but please exercise caution.

Silicom 1-year chart:

Ness Technologies 1-year chart:

Blue Phoenix 1-year chart:

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.