Jeffrey Walkenhorst

Sonic Foundry: Mediasite Franchise Value Remains Unrecognized by Market

PS - better phrasing re: split is this:
IN A SENSE, the split had nothing to do with shareholders.... some reasons do hold, such as investor perception and attracting potential institutional interest. Perhaps call/put options could even be introduced.... But, I think a major reason is customer perception.

Sonic Foundry: Mediasite Franchise Value Remains Unrecognized by Market

Hi bouncingcat,
Thanks for your comments -- appears you know the space and may even work for one of the companies....

You're right that Accordent won the Enterprise Video Platform award, which is a positive for that company and indicates favorable traction. However, Sonic also plays in that arena and has solid mind-share. For reference, please see this Streaming Media article, "Navigating the Enterprise Video Workflow", which highlights four major companies: Computer Associates (CA), Lockheed Martin, Merck, and QAD. Of the four, three use Mediasite and only Merck uses Accordent.
www.streamingmedia.com...

Mediasite is far more than simply hardware - there is a major software element, along with service/support. Combined, it's far from commoditized as indicated by gross margins in the mid to high 70% range. Personally, I'm focused on buying franchise type companies that have multiple competitive advantages and are inherently NOT commodity businesses. Technology companies are notoriously bad investments because of change/competition, yet Sonic Foundry's large and growing installed customer base suggests Mediasite isn't going anywhere anytime soon.

Importantly, operating margins and ROE are poised to move from "not meaningful" to "meaningful" as the business crosses a cash flow inflection point and generates positive net income. Acknowledging that the business (and sector) is (are) nascent with sometimes "lumpy" revenue, forecasting can be a challenge. Assuming forward net income of only $2 million would yield an ROE of approximately 20%.

The split had nothing to do with shareholders - likely reasons were detailed in my prior posts, with customer perception no doubt very high on the list. Note that shorts can still easily get squeezed since volume is so light (short ratio same pre/post split). If Sonic puts up good numbers Monday, the stock could "gap" higher and others should take notice. Expectations are extremely low.

Growing top-line ~20% in a recession isn't too bad. Otherwise, we'd probably be seeing 30-40% Y/Y.

All investments carry risk and SOFOD is an illiquid microcap, which carries even more risk. The key is to mitigate risk factors and not bet on "luck". If I'm wrong and positive free cash flow doesn't arrive as expected, I will change my tune.

How's the Economy Doing? November's 'Look Under the Hood'

Hi Leftfield, while there's room for improvement on eBay's E-Commerce site (which the company is working on), the site continues to serve a valuable market need by selling used gear/items -- many hard to find elsewhere -- and is making progress selling new items (fixed price sales up 37% Y/Y in 3Q09). Also, "Marketplaces" segment has been hurt over the past two years by large auto exposure - still 16% in 3Q09, but down from 21% in 3Q08. Yet, Marketplaces finally increased 4% Y/Y on FX neutral basis in 3Q09. Please see management presentation:
files.shareholder.com/...

Margins have come down somewhat because of SKYPE and PayPal, but a majority of the former was just sold and the latter is a growth machine. Here's part of my August blog post on eBay (note: figures are stale) -

commonstocksense.blogs...

Numerous competitive advantages protect eBay’s high margin/ROIC business model

* (1) Well-known brands with large customer base: eBay, PayPal, and SKYPE are becoming household names in many countries around world; 85M active Marketplaces accounts, 63M active PayPal users, and 338M SKYPE users

* (2) Unparalleled scale and margin profile: 2007 “Gross Merchandise Volume” (total value traded) of $59B (+13% Y/Y) places the company as the number six global retailer, just behind CostCo and Target, ahead of Sears; no real estate value for eBay, but operating margins are ~25% (GAAP) and ~32% (adjusted); Amazon’s 2007 revenue was $15B with 6% OM (adjusted)

* (3) Network effect: (1) and (2) drive (3) and are interrelated as eBay’s brand and broad reach yield incremental growth

* (4) Strong financial position: no debt and net cash to capitalization of >40%; 2008E free cash flow of $2.0B


On Nov 25 08:50 AM Leftfield wrote:

> Thanks for the hard data that unfortunately shows real declines that
> cannot be perfumed like the usual phony government statistics. Tax
> collection revenues are likely even worse than these.
> Your idea of holding companies that are in a good cash and debt position
> deserves one caveat: As with most Wall St. pictures, the one here
> of Ebay doesn't do justice to the turmoil and change of it's business
> model inflicted by CEO John Donohoe.
> It is going from a primarily small sellers auction site towards a
> fixed-price venue for me-to mass merchandisers of me-too Chinese
> products. This is to reduce their workforce and put short-term savings
> into management's pockets. There is no evidence that they can succeed
> in this direct competition against world-class talent such as Amazon
> and Wallmart.
> Their site is a mess, the result of years of such penny pinching.
> The cash flow generated by their unique free market platform for
> small sellers (who were major buyers too) has thus far covered a
> multitude of sins, but buyers should beware. Torrid growth, then,
> mere double-digit growth has given way to declines during an economy
> that would have fueled real growth by bargain seekers and distressed
> sellers had short-sited management not overreached in it's perpetual
> grab for every nickel it can shake loose for itself.

Sonic Foundry: Mediasite Franchise Value Remains Unrecognized by Market

Hello, Sonosite (SONO) actually has a $402M MC with a TTM P/S of 1.8x. But, yes, Sonic Foundry's (SOFOD) MC of ~$20M (1x TTM sales) is small and, indeed AONE and HEV are larger companies in terms of MC. Yet, that's really the point: the Market can award wildly different valuations based on current perception and/or infatuation with various trends. In this case, we have very high FORWARD P/S multiples for AONE and HEV (which leads to large MCs). Actually, on a TTM basis, HEV's revenue of $30M is only 1.6x larger than Sonic's TTM revenue, but the company trades at 20x TTM sales versus Sonic at approximately 1x TTM sales. While HEV's high valuation is awarded on a massive, expected revenue ramp, the risk of potential disappointment is elevated given such high multiples (expectations) and ongoing operating losses (cash burn). I see lower risk with SOFOD.

AOB's Cash Generation Provides Backstop to Earnings Miss

Hello China Expert, thanks for your comment. Do you mean to say:

you CAN argue that the value of this company continues to increase at a healthy pace due to its strong free cash flow generation. You CAN argue that the outlook for free cash generation is good and its a matter of simply how much?

Youbet.com: Growth Potential and Cash, Cash, Cash

CHDN is trading near/at all-time low on various valuation metrics (i.e. multiples of earnings and cash flow). If we assume CHDN is solid, durable franchise, the stock will once again trade at historic multiples at some point. On this basis, CHDN is really worth $45-50 per share which puts UBET's value at $3.70-4.00 per share. CHDN was in the high $30s just a few weeks ago. Also, note that CHDN pays a $0.50 per share annual dividend, which I expect the company can maintain even after issuing more shares to UBET shareholders.

A123 vs. BYD and Other Irrational Battery Investments

Hi John, thanks for sharing. I couldn't agree more... you might enjoy reading my 10/16 piece on this very topic (submitted to SA, but not published) - Ener1 and A123 Systems: Speculation Alive and Well in Clean Tech
seekingalpha.com/insta...
or here
commonstocksense.blogs...

Br,
JW

PetMed Express: The Type of Business We Like to Own

sorry, partial response was published - here are a few more points: So, we need to watching pricing, although I suspect Amazon may be discounting more intensely now that the peak selling season is over.

Where PetMed Express differentiates is by offering RX medications (30-31% of revenue) and a wide selection enabled by the company's niche focus (and, per management, a focus on customer care, which - of course - most companies point to). Also, the company's volume should enable very competitive pricing since it controls more than one half (6% share) of the direct mail pet medications market (11% share of total market, offline and online).

Aside from the strong balance sheet, I find solace in PetMed's large repeat business (70%), which still grew 11% Y/Y in the September quarter, and the company's large accumulated customer base (more than 5.1 million, with 2.5 million active in past 24 months). Loyalty remains high.

Just because Amazon moves into an area, doesn't mean they will dominate the category or not look to potentially make an acquisition to strengthen offerings (e.g. Zappos).

JW

On Oct 20 02:28 PM Jeffrey Walkenhorst wrote:

> Hi AB, thank you for your question. We can't take competition lightly,
> especially that from Amazon. You're right that Amazon offers quite
> a few products for pets (non RX) -
> www.amazon.com/pet-sup...;node=12923371
>
> And, some popular medications are less expensive - for example, Frontline
> Plus for 45-88 lb dogs six doses:
> $66 at Amazon www.amazon.com/Merial-...;s=pet-supplies&am...
>
>
> and $89 at PetMeds www.1800petmeds.com/Fr...
>

PetMed Express: The Type of Business We Like to Own

Hi AB, thank you for your question. We can't take competition lightly, especially that from Amazon. You're right that Amazon offers quite a few products for pets (non RX) -
www.amazon.com/pet-sup...
And, some popular medications are less expensive - for example, Frontline Plus for 45-88 lb dogs six doses:
$66 at Amazon www.amazon.com/Merial-...

and $89 at PetMeds www.1800petmeds.com/Fr...


On Oct 19 09:25 AM Alan Brochstein wrote:

> JW, what do you think about the competitive environment? This one
> caught my attention a couple of months ago, and I liked what I saw
> initially. Then, coincidentally, Amazon sent me an email regarding
> their pet offerings. Certainly not as extensive a selection, but
> the prices were so much lower and on things that I would buy.

Blue Nile: Trading on Thin Air

Hi Roger, this has long been the "call" on NILE / BIDZ -- while I believe the valuation differential will/should indeed narrow over time, the question remains timing. Investor euphoria for NILE may yet propel the stock upward, churning the stomachs and testing the patience of those with a short position. Of course, euphoria for any name can change quickly and sharply, and -- like John Neff would say -- usually smart for longs to oblige Market euphoria and sell into strength (in this case, as insiders are doing). Will be interesting to see what happens.
JW

Global Ship Lease: Heads I Win, Tails I Don't Lose Much

Hello, I'm a bit delayed in adding to this Q&A dialogue -- Pakiya, thanks for the write-up -- what do you make, if anything, of the selling by Millennium Management ("Integrated Core Strategies") during 1H09?
finance.yahoo.com/q/it...

To be fair, they still own 8.3% of the company as of 8/3/09:
www.sec.gov/Archives/e...

Perhaps simply reducing exposure in face of challenged fundamentals and credit concerns.

Thanks,
Jeff

Bidz.com: Incredible Discount Provides a Margin of Safety

Hi mals,

Can't ignore risk factors -- referenced in text above referring readers to earlier post: "In this case, despite limited short-term visibility and known hair on the story (please see our 8/14/9 post)." Link is here:
commonstocksense.blogs...

Impossible to know outcome, but there are mitigating factors and the suits appear to be bandwagon suits that are common whenever a share price declines substantially. Regardless of outcome, business model should remain intact and profitable.

Jeff

PetMed Express: Results Reaffirm Franchise's Strength

value81 - nice call on the dividend. I also thought this was a possibility, but wasn't sure on timing. Now, here we go:

finance.yahoo.com/news...
PetMed Express, Inc. (Nasdaq:PETS - News) today announced that its Board of Directors declared a quarterly dividend of $0.10 per share on its common stock. The dividend will be payable on August 31, 2009, to shareholders of record at the close of business on August 14, 2009. The Company intends to continue to pay regular quarterly dividends; however the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the Company's financial performance.

World Wrestling Entertainment: A High Dividend Stock Due for Big Profits

DD - WWE has excellent franchise characteristics and an excellent balance sheet with lots of cash and almost no debt. Still, the dividend coverage remains questionable - TTM cash flow from operations was $68.5 million less TTM capex of $18.2 million for free cash flow of $50.3 million. TTM dividends were $81.6 million. The good news is that the company can seemingly continue paying from its large, ~$200 million cash pile for perhaps 5-6 years (assuming current TTM figures) before burning through the cash. Of course, at some point, growth should return to the business and WWE may be able to grow into its dividend.
-JW

PetMed Express: A Fantastic Franchise

PS - doesn't mean DSCM can't further scale and achieve positive earnings, yet the very nature of its business yields lower margins....

On Jul 20 02:52 PM Jeffrey Walkenhorst wrote:

> thanks Anne. I'm focused on normalized operating results - here's
> what DSCM did in the March quarter:
>
> "Net income for the first quarter of 2009 was $1.3 million, or $0.01
> per share, compared to a net loss of $2.7 million, or $0.03 per share,
> for the first quarter of 2008. The first quarter of 2009 net income
> includes $1.0 million in non-cash stock-based compensation expense
> and a $1.2 million benefit from the resolution reached on April 27,
> 2009, between the company and the State of New Jersey, regarding
> sales and use taxes owed by the company for the period January 1,
> 2000 through February 22, 2008."
>
> So, if we take away the $1.2 million tax benefit, the company was
> just over break-even, and, if we view stock comp as a cash expense,
> then earnings were negative. Also, on a TTM basis, earnings were
> negative. And, the company's outlook for 2Q09:
>
> "For the second quarter of 2009, the company is targeting net sales
> in the range of $93.0 million to $97.0 million, net income in the
> range of $250,000 to a net loss of $1.75 million, and adjusted EBITDA
> in the range of $3.0 million to $5.0 million."
>
> So, forward guidance calls for break-even to a slight loss for 2Q,
> and, for 2009, the consensus forecast shows a loss of 7c. DSCM has
> scaled revenue through the years, but struggled to show consistent,
> positive net income. This is a low margin business model.