Calmer SanDisk, Resurgent VocalTec, Incredible IncrediMail

Includes: CALL, PERI, WDC
by: Shlomi Cohen

Last week was chiefly a macro week. It proved once more that the markets know how to read economic activity six months ahead. From the March low, the indices have risen by as much as 50%, and parallel with that, last week we received encouraging data on the US economy: a further improvement in the ISM survey of production; spending in the construction sector rose in June, contrary to the forecasts; home sales jumped 3.6% in June, compared with a projection of just 0.7%; and above all, the unemployment rate surprised by falling to 9.4% in July, and the number of workers laid off was the lowest in the past year.

A round of investor conferences is taking place currently. SanDisk (SNDK) founder, chairman and CEO Dr. Eli Harari, besides appearing at the 2009 Oppenheimer Technology Conference today, will speak on Thursday at the third annual Flash Memory Summit in California. In a tough year of heavy recession, SanDisk has undergone particularly big upheavals: a takeover bid by Samsung, which sent SanDisk's share price to $24; cancellation of the offer to purchase and a recession, that sent the share price down to $5 in November; strong recovery in sales, including a doubling of NAND sales; and, most importantly, an agreement signed giving a further seven years of royalty payments from market leader Samsung. The last two factors have brought the share price to its current level of $18.

Harari can now be much more relaxed, and in an address titled “Changing the World: The Flash Memory Revolution", he will talk about how the flash industry will develop in the light of the limit dictated by physics on reducing production costs, a limit it is rapidly approaching; about developments in demand under various scenarios; what will generate growth in the industry and its profitability; and lessons of the past that will guide him in the future.

From a professional point of view, the conference will mainly concentrate on SSD products (flash-based hard disks), with the immediate market being data storage on servers in large enterprises. This market is less sensitive to flash prices. Only in a year or two, with the expected plunge in flash prices, will the consumer market for storage on SSD in all types of computers develop.

IncrediMail Ltd. (Nasdaq:MAIL), which is among the smaller companies in my portfolio, released its quarterly financials on Thursday (Call Transcript). All I can say is, incredible. The stock has already returned 72% since I introduced it into my portfolio six weeks ago, and what's more, it paid a $0.50 per share dividend which is not taken into account in the virtual portfolio. Since the beginning of the year, it has risen 300%, and if anyone thinks that it's now expensive, he should look at the forward p/e ratio, which is about 9, if we assume that in the coming year the company will earn $1 per share, which is the annualized earnings per share in the second quarter.

This company's sales are growing at a 20-30% annual rate, and it has around $2.75 cash per share. True, its business model is risky, because it almost entirely relies on Google (NASDAQ:GOOG), but on the other hand, its agreement with Google is for two years, and if the company is managed responsibly, there is no reason why the agreement should not continue for a long time. Google shares in the advertising revenue that IncrediMail generates via its e-mail platforms. The risk, in my view, is not from Google, but from a possible fall in the number of downloads and users of these platforms. In the spirit of prevention being better than cure, IncrediMail is taking care to develop and launch new versions and platforms.

On the subject of Israel Internet companies, this week I decided to take another look at what's happening at a company that exactly a decade ago was at its peak, VoIP inventor VocalTec Communications Ltd. (Nasdaq:VOCL). From a market cap of hundreds of millions of dollars under the person considered the father of the field, Dr. Elon Ganor, it has been through many twists and turns, including a merger with Tdsoft, and today it has a market cap of just $6.4 million, with not many people realizing that it has $11.4 million in the bank.

Among all the inventions of the Internet world, I know of none like VoIP that so many use whether consciously through Skype or unconsciously through the various telecommunications companies and hardly anyone makes money out of, neither on the services side, like Skype, not on the equipment side, like AudioCodes (Nasdaq: AUDC), the only Israeli company to have achieved substantial sales in this niche. In the past year, VocalTec has been ably managed by Ido Gur, who spent many years at ECI.

Gur has stabilized VocalTec as a small provider of VoIP solutions to third world telecommunications companies, and has made some important moves, such as selling four of the company's eleven patents for $7 million; buying back from Cisco (NASDAQ:CSCO) all the shares the latter held in VocalTec (1.6 million shares canceled at a price of $0.40, a third of the current price); and winning a $5 million contract in Nigeria, leading to sales guidance of $6.1 million for 2009 as a whole, when first half sales were just $2.5 million.

In the conference call on Thursday, in which a handful of veteran US investors I remember from the past took part, Gur said that he had personally bought VocalTec shares in the open market. He would not say when he thought the company would reach break-even, but, on the basis of the level of expenses in the second quarter and the expected rate of revenue growth, it can be assumed that it will happen in the fourth quarter at the latest.

Published originally by Globes [online], Israel business news -

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.