Recent Financial Results Way Above Expectations

Even though Vonage (VG) (Recommend Price: $0.40,) has always been a controversial stock, I don’t think there was much to debate about after the company’s recent financial report.

Recently, however, Lamassu Holdings LLC (Lamassu), a large institutional shareholder in DITC, has commenced a proxy fight with DITC to win board seats. Unfortunately in their pursuit of Board election, Lamassu has started disseminating misleading information to stockholders of DITC, even though they claim to represent the interests of DITC’s shareholders.

Introduction

As we’ve noted in the past, we at Envoy love a good software turnaround story. The high margins and low capital needs of many software businesses can lead to impressive earnings recoveries and explosive capital gains in the event that the company’s operations are realigned in a strategically correct manner.

Introduction

When we first wrote about Merge Healthcare (MRGE), this software turnaround story had reported just one full quarter of results under the new management team and Board watch. Nevertheless, we were attracted to the potential of Merge’s imaging software business, and were impressed by the new crew’s quick restructuring efforts which paid off in a fast return to positive operating income and free cash flow after many quarters of losses.

While there has been much discussion over the potential economic outcome of Geithner’s new toxic asset plan, there has been little attention paid to the crafty use of new terminology to justify the largest theft in the history of capitalism. One wonders not about the short-term economic effects of such a plan, but rather the long-term social implications of this brazen attempt by the government to pull the wool over the eyes of a myriad of hard-working, entrepreneurial, smart, and risk-taking Americans who do not labor in the financial industry, and are faced with a true economic crisis.

In case you missed it, I highly recommend you read up on the two-part plan at the Treasury website. Here is the link. I think you’ll be fascinated by the ingenuous use of new words to justify questionable actions and whitewash the key figures whose activities have caused this crisis.

Introduction

An attractive area to look for potential turnaround investments is in the software space. Along with a plunging share price, what usually grabs our attention in a depressed software equity is a steady recurring revenue base, high gross margins, a strong balance sheet, and minimal capital spending needs. Couple that with a low valuation and a fresh management team with the skills to stabilize the core business, plus the vision to lead the firm into new growth opportunities, and you’ve got a potentially attractive investment situation.

After the close Monday, Canadian Solar (CSIQ) announced plans to sell 3.5 million common shares, raising the company’s expected fully diluted share count to nearly 36 million shares (32.4 million shares as of last report + 3.5 million shares from the announced secondary)  and its enterprise value  to nearly $1.4 billion.

Given our past discussion concerning the financing needs of several polysilicon-based module manufacturers, we were not taken aback by CSIQ’s latest secondary announcement, however we were somewhat surprised by the company’s financing method. We were expecting a larger convertible offering, instead of a direct placement of common shares. Arguably a convertible is a better means of long-term financing, since there is no immediate dilution to common shareholders.

In this post we will take a look at the future capital needs and funding requirements of four Chinese polysilicon-based PV Manufacturers.

Briefly, our conclusion, based on current low cash levels, high outstanding short-term debt as a percentage of total capital, and future capital needs, in the form of outstanding purchase obligations listed in recent 20-F filings, is that nearly all of the companies mentioned here will have a significant weakening of balance sheets in the near term, as short-term debt levels soar to support growing operating cash losses and purchase obligations. The prospect of immediate dilution via direct equity share offerings is clearly remote, as past history shows that these companies prefer to use convertible debt issues, as opposed to straight equity, as a longer-term financing vehicle.

In this post, I will address the two most common criticisms of our article last month on several polysilicon-based PV manufacturers, such as Canadian solar (CSIQ) and Yingli Green Energy (YGE), and thereby hopefully clarify the financial issues that confront many of these polysilicon-based PV manufacturers.

Before getting to the criticisms, though, it is important to note that nearly all of the comments to the post fail to distinguish between cash outflows due to capital expenditure requirements and cash-outflows due to working capital management. However, these are two entirely different issues.

Note: This article was provided to subscribers of Envoy Global Research on June 12, 2008.

Introduction

This post is devoted to some thoughts on companies in the solar industry, particularly the Chinese polysilicon-based solar module manufacturers. The basic issue I address here is the risk for a serious cash crunch at some of these module manufacturers given their working capital deficits and their capital expenditure requirements.

While Corgi’s business has surely stumbled in recent years due to past management neglect, we think that this solid brand is due for a major revival in the coming year on the heels of a significant business restructuring completed late in 2006. With absolutely no analyst coverage, Corgi’s stock could become a hot commodity once more investors recognize the company’s renewed potential, especially in light of the growing Harry Potter mania.

The Changes: Major Recapitalization and New Acquisitions

The stock still remains ridiculously undervalued, especially considering the recent rise in other larger, and yet paradoxically more "junky", fiber-related stocks.

So why is the Riley filing significant? Well quite simply, Riley has a track record of trying to buy out most of their companies at a significant premium. For a recent example of a Riley buyout saga, check out NetManage (NETM).

We think that Web.com’s stock has been in free fall over the past few months because:

* A botched acquisition of WebSource undermined management’s credibility
* The cancelled GoDaddy.com IPO forced speculators out of the stock
* Management’s adoption of what we view as a questionable shareholder rights plan.

While the top-line came in a bit below our expectations, the company reported breakeven EBITDA, excluding non-recurring legal charges. Most importantly, a brief analysis of the balance sheet suggests that BSML did in fact generate nearly 300K in cash during the quarter. Though the legal saga continue to cast a cloud over BSML's financial statements, we believe that these recent financial results suggest that BSML is significantly undervalued at the current price.

At current prices, considering NENG's cash position of nearly $33 million (NENG has no debt), the company's enterprise value is approximately $43 million. The company's sales are running at $119 million giving NENG a miniscule EV/Sales ratio of 0.36, probably the lowest EV/Sales ratio in the entire hardware market.

What's the catch? NENG relies on EMC Corp. (EMC) for over 80% of sales. And while this obviously effects the potential valuation of the company given the sales concentration, we don't think the EMC business is at all risky. In fact, we believe that NENG may see increased business from EMC in 2007, following EMC's acquisition of Network Intelligence, a big customer of NENG.

However, if it was just for their enterprise software business we wouldn't be that excited about SupportSoft. Our key thesis for SupportSoft, as outlined here, is that in addition to the enterprise software business, which has limited attractiveness, the company is in the midst of launching a new consumer support offering, via www.support.com and other channels, that has incredible potential and could yield extraordinary gains for SPRT shareholders over the next few years.

The consumer service, which is being launched with one of the largest PC manufacturers in the world (the specific name has still not been revealed), is basically an online/remote version of the incredibly successful Geek Squad, Best Buy's (BBY) consumer service division. Our own research and personal experience definitely supports the notion, advanced by SPRT and many other corporations, that paid support for consumers will become a huge market over the coming years. SupportSoft management, as well as other sources, estimate the total market size at $10 billion. Interestingly, aside from the Geek Squad, there is as of yet no real brand in this industry, opening up the opportunity for SupportSoft to quickly position itself as a leading player in the growing consumer support industry. SupportSoft plans to launch its consumer service in early 2007, but trials will begin in the fourth quarter of 2006.

Interestingly, though the hype surrounding the company's technology has been focused on the wrinkle market, current management seems most optimistic concerning the application of the platform for the burn scar market. There is currently no cure for the segment of the burn scar market that ILE is targeting and it therefore appears likely that the company may receive fast track approval for this indication. The market potential of this application ranges from $125 million to $700 million. We expect to hear news concerning late-stage burn scar trials in early 2007.

On another note, given the tremendous success and growth of the cryogenic storage of umbilical cord blood (i.e. ViaCell (VIAC) and Cryo-Cell (CCEL), we are convinced that ILE has the potential to launch a similar type of service for the aesthetics market once, or perhaps even before, their wrinkle product receives FDA approval. Instead of storing umbilical cords, though, ILE would cryogenically store patients' fibroblasts for future treatments via the Isolagen process.

Jason Hart, CEO of ActivIdentity, had this say: "The issuance of HSPD-12 enabled smart cards throughout the government is a tremendous first step toward the security and efficiency goals set by the President. We are now working with many agencies to help them begin the process of putting the infrastructure and applications in place to allow the full potential of interoperability and advanced authentication."

Interestingly, the Stanford Group Company values the HSPD-12 market at approximately $1.3 billion over five years, with the bulk of the revenue flowing in fiscal years 2007-2009 (Identity Solutions Industry Outlook, July 2006). So clearly, ACTI has a significant business opportunity as HSPD-12 rolls out.

For a variety of reasons, Isolagen has had a few tough years, and shareholders of the company have suffered, with the stock declining to a low of $1 from over $8 in 2005. However, in June 2006 the company brought in Nicholas L. Teti to turnaround the company. Mr. Teti was the former CEO of Inamed Corp., a healthcare company that developed aesthetic products, and was sold to Allergan for $3.2 billion in 2005. Under Mr. Teti’s tenure, Inamed’s revenues nearly doubled to $440 million and its stock increased nearly fourfold to $84 per share. Notably, Mr. Teti has already brought in two other high-level executives from Inamed, to help restructure Isolagen.

It appears to us that the main problem for ILE in the past, had been that it did not have the right people in place with the proper experience in FDA Protocol Design, Manufacturing, and Marketing to really position this company for success, despite what appears to be an extraordinary platform for skincare therapy. The arrival of Mr. Teti and his team of proven executives, however, greatly increases the odds that Isolagen shareholders will finally see substantial returns on the company’s unique autologous cellular therapies for the treatment of wrinkles, burn scars, acne scars, and many additional potential applications.

We believe that the company’s still solid balance sheet, valuable Internet property assets, and the low valuation of its shares relative to future business prospects, offer investors solid downside protection, as they wait for the company’s current management team to execute on new strategic corporate initiatives.

Specifically, it appears to us that Autobytel has failed to deliver satisfactory financial returns in the past because the company’s previous executive management teams have focused on building an online lead generation business, and other non-core auto businesses, while the real profitable action in the Internet industry was and will continue to be in the high-margin advertising business.