Dustin Moore's  Instablog

On Tuesday, Elephant Talk Communications held a conference call providing greater detail on the Visa Europe agreement, the recent partnership with KPN, as well as the overall progress of the company progress in 2010.  This provides clarity for shareholders and a “cheat sheet” for new investors.

Here are the highlights:

-Visa Europe agreement

ValidSoft’s solutions are currently being integrated into Visa Europe’s processing platform. When complete, Visa Europe will offer the solution as to their 4,000 member banks and payment service providers across Europe. 

The company sees the agreement positioning them as “…a global leader in credit and debit card fraud prevention.”

The deal was instrumental in creating credibility.  Thus, management “…anticipates other agreements will follow in the near future.”

-KPN Belgium-

ETAK just announced a hosing agreement to become the MVNE of KPN in Belgium.

-Milestones

Vodafone Spain- Migration of customers will be complete by first half of 2010, resulting in annual run rate of $7 million.

T-Mobile Netherlands- T-Mobile saves 50% by using Elephant Talk’s platform. There will be 100,000 subscribers by the end of 2011.

Financial/Business Outlook

Convertible promissory notes have been converted into equities.  Shareholder equity shifted from -$28 million to +$28 million.  This will facilitate and uplisting in 2011, which appears imminent.

The CEO expects to become positive cash flow from operations by mid next year.

Expect a total of 700,000 subscribers by the middle of next year.

Foresee several mobile operating partnership agreements in 2011.

Other Noteworthy Items

“No competitors in sight” -The company has the only technology capable authenticating a transaction within the 500 millisecond window for a transaction to be approved or declined.  The only system that is implemented in real-time.

They already have the capacity to handle 400,000 transactions per second! (More than enough to process Visa Europe transactions)

The company’s ultimate goal (and how I see the market eventually ending up) is to have ValidSoft technology laid on top of current mobile infrastructure.  This will be a paradigm shift where Elephant Talk will determine authentication of all transactions.  This will save banks money by increasing accuracy as well as minimizing their exposure to fraud.

Within Europe alone, there are 100 billion transactions per year.  If they become fully integrated on they will be servicing every transaction.  At 1 cent per transaction, this results in recurring revenue of $1 billion per year in Europe alone.  This example is only to demonstrate the size of the market that Elephant Talk could service.  As far as pricing, they would expect a “hell of a lot more” than 1 cent per transaction.  They were clear shareholders should only take this information as indicative of the industry size.  However, they do believe down the road they are extremely well positioned to take this market with their technology, patents, and privacy seal.

There are estimates that 50 billion devices will need access to the mobile cloud in the future.  These will consist of mobile phones as well as vehicles, electric meters, copiers, and other machines.  Non-telecom companies will therefore need access to the cloud.  Elephant Talk is uniquely positioned to open up the mobile cloud for them, manage it, and make it secure.

What Worldwide Energy & Manufacturing USA, Inc. is:

Per the company website:

Worldwide Energy and Manufacturing USA, Inc., headquartered in South San Francisco, California, is a 17-year-old engineering-oriented firm specializing in photovoltaic (PV) module, mechanical, electronics and fiber optic products manufacturing. The company's worldwide customer base includes the solar energy, wireless telecommunications, aerospace, automobile and medical equipment industries.  Worldwide’s competitive advantage is its ability to timely deliver high quality components at costs that are at least 50% less than what Worldwide’s customers pay for similar products in the United States.

Recent Developments:

I will start with a little backdrop on the most recently announced quarter.  Second quarter 2010 earnings were outstanding.  Revenue was up 30% from the first quarter 2010 and about 300% year-over-year (although the second quarter 2009 was admittedly dismal, this huge increase still demonstrates the strength and momentum of the company).  More importantly, the company states that they “…anticipate continued growth over 2009 sales levels as we move into the second half of 2010.”.

In fact, the Worldwide recently announced an update of financials for the month of July 2010.  The results were very positive and should reflect how the rest of 2010 will pan out for the company.  Furthermore, it makes the future of WEMU quite clear from an investor standpoint, in an otherwise very unclear economy.  Here are details on the July performance:

Revenues for July were up about 229% compared to July last year, totaling approximately $14.8 million.  That is almost as much as the ENTIRE third quarter last year of 18.6 million in revenue.  The company’s revenue projection for this quarter is $44 million, which would translate into a mammoth 236% jump.  Even better is that this will be coupled with improving profit margins from the previous quarter. 

It should also be noted that Worldwide has recently opened a new 129k sq ft photovoltaic solar module production and R&D facility in China.  Production there is set to begin in the fourth quarter this year.  This is important because the company cites this new facility as a strong driving factor that should improve gross and net margins.  The CEO also sees a sharp increase demand for the company’s high-quality solar modules creating scale economies that will also improve future margins.  WEMU has also expressed plans to add 80 more employees by the end of the year, reflecting the clear increase in demand for their products as well as demonstrating the confidence management has in their future.

But oddly, all of this very news has had almost no effect on the stock price.  However, this makes for a great buying opportunity for investors.

Other important facts to note:

·         -Insiders own almost 40% of stock, which is always a powerful indicator of management confidence and should put investors at ease that their fate is largely tied to those controlling the company.

·         -Conservatively, I project a P/E of about 5 – yes 5 – by the end of the year (if company profit expectations hold) and that could, and is likely, to be too high.  This number is very low in the solar industry where much higher P/E’s are common in slower growing companies such as First Solar (FSLR) or Suntech (STP).  Global demand for solar continues to grow, with heavy investment from China.  This should continue to play into the company’s playbook.

·         -It is unfortunate that company trades over-the-counter as opposed to being listed on the NYSE or NASDAQ.  No doubt this prevents a higher value of the company shares.  However, the company confirmed that the only roadblock to uplisting is that share price must trade above $4.00 for at least 10 trading days.  This does not guarantee uplisting, but it is the only hurdle left.  Owning the stock at these levels may be a good idea ahead of a possible uplisting.

·         -The stock has bounced off its 52 week low, trading near cash levels.  Thus, there is low downside potential, high upside potential.

·         -Just days ago, Worldwide’s CEO Jimmy Wang quietly purchased 10,000 more shares spread out over the first three days of this month (adding to his already enormous 1.6 million shares).  This may not be a large buy but demonstrates the confidence management has, as well as their belief the stock is cheap here.

·        - Most significant fact: WEMU has essentially no debt, but has confirmed that they have a pile of $13.5 million in cash.  That translates into $2.39 in cash per share.  As of 9/7/2010, the stock traded at only $3.69!  That is a very small premium to pay for a growth stock barely trading above cash levels.  This also makes it much less risky to own, with a very high upside potential in my opinion.

At least in the near term, investors should benefit from the increasingly positive growth and rising profits from this company.  The recent financial updates are not accurately reflected in the share price.  Company forecasts for the remainder of the year make the current price barely above what cash levels will be by the end of the year.  Furthermore, none of this is taking into account the tremendous growth the company and the solar industry as a whole.  Eventually the sun will shine on the stock and investors will jump in – ultimately value will have to be realized.

On Friday I commented on the sharp stock increase of VirnetX Holding Corporation (VHC).  The stock rose ~13% on 4 times normal volume that day alone.  Options looked even more bullish with almost 40 calls per 1 put!  Over the past week or so the stock is up over 60%.  Investors are clearly seeing value in the company.  So what has caused this increase and is it likely to continue?  I thought I would provide some analysis on the stock over this holiday weekend.  There are several aspects of this company.  I limit this to two significant areas for simplicity.  The company’s Secure Domain Name Initiative (SDNI) and the current litigation involving the company’s patents.


What is VirnetX?

Per the company website:

VirnetX , an Internet security software and technology company, is engaged in commercializing its patent portfolio, developed from work done for the Central Intelligence Agency, by developing a licensing program as well as developing software products designed to create a secure environment for real-time communication applications such as smartphones, instant messaging, VoIP, eReaders and video conferencing. The Company’s patent portfolio includes over 48 U.S. and international patents and pending applications that were recently declared as essential for 4G security specifications and provide the foundation for the Company’s unique GABRIEL Connection Technology.

I. Secure Domain Name Initiative:

VirnetX has announced that they are in the process of launching a Secure Domain Name Initiative (SDNI) and are in ‘active discussions’ with the leading 4G/LTE companies “to participate in a design pilot this summer for delivering to end-users and consumers of the Internet and mobile devices the needed and necessary security requirements for the next generation 4G/LTE wireless networks.”.  The pilot will implement VirnetX’s patented Secure Domain Name and automatic Virtual Private Network technology.  These talks include big name tech players in the fields of domain infrastructure, chipset manufacturers (Qualcomm for example), and service providers (AT&T, Verizon, etc.).  This announcement is ‘on track’ and will be announced within the next couple of weeks.

The company believes that they hold the majority of 4G security patents, and more significantly, the most important ones.  There are literally hundreds of companies (there words not mine) that could/will likely license with them on this front.  Furthermore, they see this upcoming SDNI pilot with be the first of many licenses to the “Titans” of the tech industry.  The pilot is expected to move into production in 2011.

Secure domain names are an integral part of securing 4G/LTE wireless networks.  All 4G mobile devices will require their own individual secure domain name and become part of a secure domain name registry.  Here is the key: VirnetX owns the rights to the key fundamental mechanisms for providing these secure automated communications across the Internet using VirnetX’s proprietary Secure Domain Names and Secure Domain Name Registry service!

           
II. Litigation Background:

            VirnetX is also involved in litigation involving some of their core patents.  Earlier this spring, VirnetX settled a patent dispute with Microsoft involving 2 patents, patent numbers '135 and '181.  These patents essentially detail methods of setting up virtual private networks.  This settlement was reached after a jury awarded VirnetX $106 million dollars.  The judge would have likely trebled that number.  In the end, the settlement with Microsoft included a $200 million license VirnetX's VPN technology.
            To add credibility to these patents, the U.S. Patent and Trademark Office re-confirmed these two  key patents following the settlement (after Microsoft requested they be inspected further for validity) .  Thus, these patents were confirmed by a jury, confirmed and re-confirmed by the USPTO, and were licensed by tech giant Microsoft -- very solid ground to stand on for future litigation.
            What makes this more exciting is that on August 11, 2010, VirnetX filed a new lawsuit against Apple, Cisco Systems, Aastra, NEC Corporation.  This new lawsuit involves 5 of the company’s patents, the two same patents from the Microsoft trial ('135 & '181), as well as patent numbers '759, '504, and '151. 

            It is important to remember that the new case is much, much larger than the Microsoft case, involving billions of more dollars more in products sold.  This fact, combined with a solid precedent and a large cash arsenal, makes it much more likely that this case settles for much higher dollar amount than Microsoft forked up.  With the plethora of products Cisco is accused of infringing in addition to the lucrative iPod, iPad, and iPhone, I cannot see a settlement below $500 million total between just these two companies -- and that is a very conservative estimate.  That alone is an additional $10/share, of course without lawyer fees taken out.  But it is very clear that any settlement would send shares substantially higher than they stand today.  And it is my opinion, from the evidence that I am able to find, that the company is well prepared and positioned on the litigation front.  Even more exciting is the fact that it is apparent that many, many more multibillion dollar companies are infringing and would need to license from the company.  Possible licensees include Intel, Sprint, Deloitte & Touche, Google, HP, Motorola, CSCO, Verisign, RIMM, Merrill Lynch, Nokia, Verizon, Avaya, Juniper, AT&T, Seimens, NEC, Nortel, Ericsson, Vodaphone, U.S. Government.  I could list more, but I think you get the picture.  Potential goldmine here.

III. Summary: What the company has going for it:

-A 4G/LTE pilot program to be announced very soon with many leading technology companies.
-The growth of 4G will make mobile devices the fastest growing segment in the world economy, and VirnetX may be very well positioned to be in the center of this exciting area of growth.
-A smoking hot M&A environment with high premiums for security/cloud computing companies.
-Lots of cash.
-VirnetX's previous litigation achievements provide a very concrete foundation for litigation and create a very tough situation for Apple and Cisco.  What do they do?  1.) Fight an uphill battle in court and face possibly triple damages  2.) Settle for a better deal, or possibly, 3.) Buyout?
-Great leadership and vision.

            The company has indicated an announcement of the SDNI pilot program will occur this month.  In my opinion, it could be released this week, but next week appears just as likely.  Either way, this alone will push the stock between $10-$11 fairly easily in the short-run.  Given this seemingly imminent news, the company is clearly a steal at these price levels.  I see the recent price movement as a sign that the world is beginning to see the potential of this company.  And if they are correct, this is only the beginning.  Buy the dips my friends.

-Building Wealth