Owner-Oriented Investment Research and Commentary - Have a private comment or question? Email us at commonstocksense@gmail.com

Sunday, January 31, 2010

Interesting Maritime Port Data and Seaspan

We're probably overdue in updating our periodic "How's the Economy Doing" series, although we did include economic data in our "Which Way from Here?" presentation the other week. Below, we briefly share some data from The Port of Los Angeles regarding shipping tonnage. We're interested in the data because of our ownership positions in certain container shipping companies, including Seaspan (SSW, $10.36). We mentioned Seaspan in our presentation and also in early January here.

First, let's look at historical market development (source here) at The Port of LA in tonnes:

Second, recent monthly (December) and annual statistics (source) for containers (TEUs):
Finally, here are monthly 2009 container volumes -- note Y/Y improvement in December (*easy comparison) -- probably too small to read below, so please see source here if interested:

November containers (total - loaded and empty) were up 12% Y/Y while December's volume was up slightly (nearly flat) Y/Y. For calendar 2009, shipments were down 14% Y/Y.

While 2010 trends may remain subdued, stable to slight growth on easy Y/Y comparisons -- as in November and December -- is clearly preferable to continued declines. Per our prior posts, we believe improved global psychology is a positive for the overall economy. We plan to keep monitoring the data and will soon share a bit more on Seaspan.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Friday, January 29, 2010

Sonic Foundry Delivers and Reiterates Guidance; Large Deals Becoming Reality

After Sonic Foundry's (SOFO, $5.40) fiscal 2009 report last November, our post was "To Believe or Not to Believe (in the Mediasite Franchise)?" (link here). Readers probably know by now that our research provides ample evidence to believe in the franchise. We included more support for the franchise thesis earlier this week (here). Still, ultimately the financial results must confirm the presence and durability of a franchise.

We think fiscal 1Q 2010 results released yesterday are another step in the right direction and -- importantly -- forward guidance for a "tipping point" (as coined by author Malcolm Gladwell) this year remains intact. In fact, management said we'll begin to see "large deal impact" during the March quarter (fiscal 2Q 2010). This is ahead of prior guidance calling for large deals to hit late spring and summer (June/September quarters). We recommend watching the half hour presentation - link here.

An interesting sidebar (pointed out by someone on the Yahoo! Finance Message Board here) is to watch Sonic Foundry's earnings Webcast and compare the Mediasite delivery to that of video conferencing giant Polycom's recent earnings Webcast (PLCM, $22.48) - link here. Polycom uses a pop-up window with video playback via user selected Windows Media or Real Player that has a slide window to the right. Yet, the slides didn't move for us. Instead, to share/show each new slide, a new browser window is launched each time (!!!), which -- to put frankly -- we find cumbersome and suboptimal. We suspect Polycom management would not only agree but likely prefer to use Mediasite to deliver their quarterly message (and other corporate events). Thus, as discussed in our "Get the Memo" post on 1/03/09, Polycom provides us with yet another example of an organization that needs Mediasite, albeit one sitting squarely in the video arena.

Back to results. For the quarter, revenue of $4.5 million (+12% Y/Y) was better than implied guidance for only $4.0 million and the company's GAAP net loss was only $320 thousand compared to $1.3 million (revised) in the year ago period.

Sonic's trailing twelve month income statement is as follows:
  • Billings of $19.5 million were up 1% Y/Y (expect acceleration in coming quarters)
  • Revenue of $19.1 was up 12% (catching up to TTM billings)
  • Gross profit of $14.6 million was up 16% (margin expansion)
  • GAAP operating expenses of $16.1 million were down 10% (expense reduction)
  • Cash operating income of approximately negative $150 thousand (a $900 thousand Y/Y improvement)
Looking at the balance sheet: deferred revenue at 12/31/09 increased 10% Y/Y to $5.04 million, total debt increased to $1.01 million from $529 thousand a year ago, and net cash declined by $1.6 million to approximately $1.27M (total cash was $2.4 million). Net cash was down only $157 thousand Q/Q as positive working capital helped offset the company's modest operating loss. Management again noted that debt will increase to fund anticipated working capital needs to support large deals expected in coming months that should drive rapid top-line growth. Then, meaningful positive cash flow should arrive, improving the company's net cash position.

A few slide highlights - new customers:

More on the outlook and market position:
In Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers by Geoffrey Moore (included in our reading list here), Mr. Moore shares his view of the technology adoption life cycle and strategies for making the jump -- i.e. "crossing the chasm" -- from "Early Adopters" to "Early Majority" and then to the "Late Majority". Mr. Moore's advisory firm, TCG Advisors, includes several related presentations on its Web site (link here).

In one deck,
Dealing With Darwin - Innovation Vectors TCG Advisors Deck, he illustrates the life cycle with a "bowling alley" and "tornado" in the "Early Majority" phase as adoption accelerates on the way to "Main Street" adoption. Given Sonic Foundry's guidance and apparent confidence that the large deals are in process (i.e. a reality), we think Mediasite is currently making the leap to mainstream adoption. Of course, execution is critical during this stage and, along with IT budget pressures, represents a primary risk factor.

Let's briefly consider two scenarios:
  • (1) The best case scenario for investors: earnings power finally becomes material in calendar 2010, although the Market (today) may not believe the future promise until micro-cap Sonic truly shows it the money (within next six months). At that point, interest in "the story" suddenly perks up and valuation expands along with investor/media interest. We've seen it before with other companies. If quarterly revenue can scale to the mid-$6 million range, we estimate quarterly earnings of around $0.25, or approximately one dollar annualized. At that level, even a conservative P/E multiple puts shares meaningfully higher.
  • (2) The worst case scenario: large deals fail to materialize and the business trends flat and/or erodes and funding is a problem in a still fragile economy. The stock languishes and declines.
Which scenario is most likely? Per our "Which Way from Here" presentation, we quickly admit that short-term forecasting is a fool's game. Also, traditional value investors might pass over Sonic Foundry given a history of operating losses and a small net cash position (limited margin of safety, at first blush). We acknowledge that our ownership stake falls into the speculative camp and, as noted in the past, we consider our investment somewhat akin to late stage venture capital.

However, we find comfort through our extensive technology industry experience and Mediasite franchise analysis.
Notably, we see and hear increasing, consistent, and favorable feedback from customers -- for the latest, please see the Big Bend Webinar this week:

Getting the Buy-In and Budget to Launch Hybrid Courses Right Now

Getting the Buy-In and Budget to Launch Hybrid Courses Right Now

Russell Beard of Big Bend Community College shows you how one of the smallest community colleges in the state of Washington with one of the largest service districts – 4,000 students across 4,500 square miles – found the money, time and political will to launch a webcasting program.

While acknowledging risk factors, we can now feel even better with our November conclusion on the back of reiterated guidance -- given the company's expanding customer roster and forthcoming campus-wide adoptions, we continue to believe our initial thesis: competitive advantages point to a powerful, sustainable franchise -- Sonic Foundry is (1) far along the learning curve with (2) intellectual property protection, and (3) very satisfied, captive customers that face high switching and search costs. Points (1) – (3) are both related to and strengthened by (4) economies of scale and (5) leading market share.

Furthermore, our intrinsic value estimate of $20-27 is supported by an estimate of reproduction cost as well as the probable private market value that would be awarded by an informed strategic buyer based on trailing financial results (without the benefit of insights into Sonic's pipeline that might support a higher "PMV", 2009 M&A comps provide support).

We will follow-up in February with a bit more on how to interpret forward guidance.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, January 28, 2010

Shares of Netflix "Go Crazy" on Strong Results, Upgrades, Short Squeeze

Shares of Netflix (NFLX, $63) are up 23% today following a strong earnings report yesterday (access here) that brought some brokerage firms to upgrade the stock and still lingering "shorts" to cover. Although short interest is down over the past six months, the level remains extremely high at 32% of float (per Yahoo! Finance). In our view, the short call (possibly on valuation) is especially dangerous since fundamentals remain strong (even prior to yesterday's results).
We mentioned in May 2009 (link here, including mention of NFLX) that we generally like subscription business models (e.g. j2 Global Communications/JCOM). The below summary from Netflix's highlights presentation reveals the power of the company's business model:

But, last October, we wrote "Netflix Buying Back Shares with No Room for Error; Probably Better to Hoard Cash" (link here) when the company was repurchasing shares in the mid-$40s (19x newly issued midpoint 2010 GAAP EPS guidance of $2.39, or a 5% earnings yield). In 4Q09, the company repurchased 1.6 million shares at an average price of $49.09 (per conference call commentary).

We're not going to recount results here, but all key metrics all moved in the right direction: aside from 24% Y/Y revenue growth for 4Q09, margins were higher and net subscriber additions were up nicely Y/Y while churn and customer acquisition costs were both down Q/Q and Y/Y.

We still prefer that companies allow excess cash to pile up on the balance sheet rather than repurchase shares at elevated P/E multiples. However, in light of Netflix's operating leverage and continued growth, the prior buyback appears more sensible than we acknowledged. That said, if the company continues to repurchase at current levels, the forward P/E (GAAP) would be in the mid-20s, which is less compelling. On a trailing free cash flow basis (non-GAAP, as reported by Netflix, after acquisitions of content library and other items), shares of Netflix are currently trading with an implied yield of only 3%.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long JCOM.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, January 25, 2010

Sonic Foundry's F1Q10 Report (Thurs): Guidance is the Key; More Examples of the Mediasite Franchise

Based on prior management guidance, our expectations are modest for Sonic Foundry's (SOFO, $5.50) seasonally slow December quarter (report expected Thursday afternoon). Recall that guidance was something to the effect: "December and March quarter revenue should be similar to fiscal 2009 levels with potential for better bottom-line performance on the company's streamlined cost structure." Thus, for F1Q09, revenue might be $4.0 million with another operating loss (albeit narrower Y/Y). Further, public/private school and corporate IT budgets remain tight, which remain a primary risk factor.

Yet, since the Market is forward looking, the key lies in forward guidance -- specifically, an update with regard to the "half dozen multi-million dollar deals" expected this year that "may mark a significant turning point for the company...." Assuming guidance remains intact, we'll come back post-results with commentary on how these deals could translate into meaningful, positive earnings for the company and, quite possibly, a higher valuation. For now, we'll say the following: while the Market views Sonic Foundry as a "show me" story, we still believe the company's approximate $23 million enterprise value gives essentially no credit for the growing Mediasite franchise.

What gives us confidence in "the franchise"?

First, as someone pointed out with regard to our "Which Way from Here?" post, the market need is readily apparent for high quality video/slide capture: "...this, more than anything you've written the last year, just really shows how invaluable Mediasite is becoming!" Please see my video post to understand what he/she means with this statement.

Second, by following Mediasite on Twitter, we saw the following Twitter post the other day:

From http://twitter.com/weslinda [who works at Johns Hopkins University]:
  • We had 11,000+ views of our @mediasite videos last year. I wonder if we can triple it in 2010? 4:16 PM Jan 20th from Seesmic [if we read correctly, these views were only for his particular group, not all of JHU]
Response from http://twitter.com/robgrau [who works at North Carolina State University]
  • @WesLinda We had 8500+ #Mediasite views in last 7 days. JH student body not as big as NCSU, but you should still triple your views easily. 6:04 PM Jan 20th from web
These posts remind us of a Sonic Foundry Webcast in June 2008 that featured Penn State Hershey Medical Center:

The presentation included a graph of Mediasite recordings to-date (through June 2008):

Impressive uptake and we'd love to see a current update from Dr. Scaduto. Based on JHU and NCSU Twitter commentary, a very rational guess is that similar growth continued during 2H08 and through 2009 at Penn State, as well as at most other Mediasite customers, all of which use the solution daily to capture and organize hundreds of hours of content. Such growth exemplifies what we mean when we speak of "the Mediasite franchise". We wonder how many classes have been captured by KAUST (in Saudi Arabia) since opening in September.

Finally, remember what Sonic Foundry relays in the company's 10-K:
  • Repeat orders: Many customers initially purchase a small number of Mediasite Recorders to test or pilot in a department, school or business unit. A successful pilot project and the associated increase in webcasting demand from other departments or schools leads to follow up, multiple Recorder orders as well as increased Mediasite Server capacity. In fiscal 2009, 62 percent of billings were to preexisting customers compared to 59 percent in fiscal 2008.
We think potential for incremental repeat orders will remain material this year and in future years.

While the Market tends to fall all over the most popular tech companies and award rich multiples, we're not interested in buying fairly/richly valued mainstream companies with no margin of safety. We typically want to acquire ownership stakes in unloved or under-followed franchise-type companies with a margin of safety. In this case, we continue to see a favorable risk/reward profile for below-the-radar micro-cap Sonic Foundry.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Friday, January 22, 2010

Which Way from Here? Video Presentation from COMMON STOCK $ENSE

We were a guest speaker at an institutional investor forum on Thursday (1/21/10) in New York City. The event was not Webcast and, initially, we planned on only sharing our slides with readers here at COMMON STOCK $ENSE. Then, last night, writing about Google (GOOG) and Youtube (and the need for Mediasite), we realized that sharing a brief video recap of the presentation via Youtube would not be difficult and would enable us to "speak" to readers. SO, we did it, recording slides with our talking head!

Unfortunately, it's not Mediasite (Sonic Foundry/SOFO), but our set-up seemed to work OKAY. We hope you find the content both stimulating and enjoyable. One note: we ran a bit over our initial plan for only ten minutes (Youtube's time limit per video) and, after efforts to tighten delivery, decided to simply cut our first take into two parts as ten minutes wasn't enough time.

In "Which Way from Here?", we discuss the markets, psychology, the economy, and investing, plus our investments in 1-800-Flowers.com (FLWS), Seaspan (SSW), and Weight Watchers (WTW). Topics covered include: Weve Come Along Way, Old Adages Ring True, Economic Data Shows Stability, Easy Money Has Been Made, Yet, Plenty of Mixed Signals, Short-term Forecasting is Fools Game, New Normal Are You Sure?, and Our Old-Fashioned Strategy: Think and Invest Like an Owner, as well as opportunities in (1) Consumer Discretionary (Flowers/Gifts), (2) Container Ships, (3) Personal Services (Weight Loss Management).

Slides can be downloaded here.

Video Part One (Market Overview, Psychology, Economy, Easy Money, Mixed Signals, Pros Get Short-Term Wrong):

Embedded slides:

Video Part Two (New Normal or Not, Investment Approach, Stock Ideas):

Thank you for tuning in and please feel free to share if you feel so compelled.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, FLWS, SSW, WTW.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, January 21, 2010

Google Needs Mediasite; EDUCAUSE Learning Initiative 2010

For the first time today, Google (GOOG, $583) Webcast its 4Q09 call using Youtube (link here) rather than offering audio playback through Nasdaq's (NDAQ, $18.97) Shareholder.com with Windows Media Player and Real Player (RNWK, $4.49) -- e.g, see 3Q09 call. We think the Youtube delivery is arguably an improvement over the latter, although as with the "old" Google method, no synchronized slides are included -- the Youtube Webcast is audio only and slides are separate, either via Adobe (ADBE, $35.82) PDF or Google's "docs app". In our view, Sonic Foundry's Mediasite would be an improvement (recall, our "get the memo" post) for any organization that isn't yet on board.

Separately, Sonic Foundry announced today that it is again capturing another EDUCAUSE event with Mediasite. We were actually aware of the event earlier this week by following Mediasite on Twitter (http://twitter.com/mediasite). The press release markets the event as follows:
  • "Learning Environments for a Web 2.0 World" sessions explore models for the future of learning that fuse emerging technologies and learner-centered strategies to yield new learning environments designed for student success. The rise of Mediasite as a webcasting platform, combined with social networks and virtual communities like Second Life, Twitter, Facebook and Flickr has transformed the web from a place to seek information into a gateway to share, build, and interact with both educational technology content and communities.
The catalog link is here -- intriguing stuff, especially for those interested in education. We are pleased to see Mediasite's prominent role is such events and expect to see more and more catalogs just like this (partial sample):
Who knows if Google will go there, but we know Autodesk (ADSK, $25.69) is already there and extremely satisfied (again: Autodesk University, four years and counting with Mediasite).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

eBay Again Delivers the Goods - Growth Accelerates and Cash Keeps Building

We've commented on eBay (EBAY, $22.23) in the past, noting that we like the company's competitive advantages and significant free cash generation.

eBay reported 4Q09 results yesterday that further illustrate the company's still relevant presence (despite hub-bub over Amazon/AMZN, $125.78) and large, consistent cash generation. For those interested, we recommend giving a look at the results and presentation. Below, we highlight a few interesting slides.

Overall revenue shows solid Y/Y growth:

Free cash generation continues:

PayPal is strong, yet core e-commerce platform holding its own:

Cash building (including proceeds from Skype sale):

With a current free cash yield to equity holders of approximately 8%, shares are no longer in the bargain bin. Still, the valuation isn't stretched like AMZN or egregious like Blue Nile (NILE, $55.35). We're comfortable holding our shares and remain confident in future earnings power.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long EBAY.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, January 19, 2010

Folks Care for Pets as if They Were Children

PetMed Express reported results today. While last quarter was a bit short of expectations, the company beat estimates this time around. We continue to like the company's annuity-like business model, free cash generation, and debt free balance sheet.

Total revenue increased 11% Y/Y to $48 million with reorder revenue increasing 17% Y/Y to $37.6 million (78% of total) and operating income increased 12% Y/Y to $8.4 million (17.4% margin). Net income was up 14% Y/Y to $5.6 million (11.6% margin) and EPS of $0.25 increased 18% Y/Y. The company's net cash position increased 64% Y/Y to $68.9 million and retained earnings increased 19% Y/Y to 90.5 million.

Clearly, an impressive performance during a recession. Pet care continues to show resiliency and, apparently, is not discretionary as folks care for pets as if they were children. We like it.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long PETS.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Saturday, January 16, 2010

j2 Global: Plenty of Excess Cash for a Dividend; Why Not? World Wrestling as Example?

Following up on our j2 Global Communications (JCOM, $19.32) post the other day regarding all of the cash that is piling up on the company's balance sheet (and whether JCOM is a value trap).

We expect j2 may announce plans for excess cash in conjunction with the company's 4Q09 earnings call in February. Once the Market is made aware of expected uses (beyond potential M&A), shares may finally push higher. That said, lasting value depends on continued prudent allocation of shareholder capital.

Given j2's large cash pile and steady cash generation, we see no reason why j2 couldn't use cash in three ways: (1) sensible acquisitions, (2) share repurchase, and (3) initiation of a dividend (if lacking sufficient, other high ROIC opportunities -- *we think the business simply generates too much cash, which is a good thing). With annual free cash generation of more than $90 million ($2.00 per share), j2 could easily payout one quarter of this amount ($0.50 for 2.5%) and still retain a large cash pile for options (1) and (2). Historically, acquisitions have usually been small, leaving meaningful excess cash for other options.

Actually, with $222.5 million of net cash as of 9/30/09, j2 could afford to initiate a higher annual dividend, say $1.00 per share (5.0% yield). Without tapping the existing cash balance, such a payout would require only one half of annual free cash generation and likely leave another $45+ million to accumulate on the balance sheet for acquisitions and/or share repurchase.

Another option is to pay an even higher dividend, akin to World Wrestling Entertainment (WWE, $15.99). World Wrestling pays an annual dividend of $1.44 per share (9.0%), which -- at first -- appears a red flag since annual earnings are only $0.70-0.80. However, at 9/30/09, the company had a net cash position of $202 million (17% of market capitalization) and trailing twelve month free cash flow was approximately $101 million (8.6% FCF yield). Over the past year, the company's net cash increased despite a huge payout. With an asset light business model (*although capex can vary year to year) and prudent working capital management (*note: w/c requirements not consistent over past several years - need to watch), World Wrestling appears capable of making $82 million in annual dividend payments and leaving the large cash pile entirely untouched. Per management commentary and guidance, the company expects to grow into the dividend over the next several years, improving coverage through reported EPS.

In The Aggressive Conservative Investor, Martin Whitman and Martin Shubik write the following about dividends (page 240):
  • "A long-run, consistent dividend policy is frequently essential if a company is to obtain general recognition in the financial community as a high-quality issuer. Such recognition tends to result in better prices for a company's common stock over the long-term, and may attract outside stockholders who are stable investors interested in income (insurance companies for example) rather than in-and-out traders or go-go speculators."
We think a dividend might lead to a higher multiple for JCOM. At present, the Market -- probably on value trap fears (please see prior post) -- is currently offering JCOM for an 11% (9.0 multiple) yield on market capitalization and a 15% FCF yield (6.5 multiple) on enterprise value (okay to use FCF to EV since interest income is very small at present). It's true that j2 Global can repurchase shares on a highly accretive basis at current levels, yet we think the Market would very likely reward the company (and shareholders) if it became a regular dividend payer. Let's see what unfolds in coming months.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long JCOM.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, January 14, 2010

j2 Global Communications (JCOM): Is it a Value Trap?

We're still long j2 Global Communications (JCOM), but noted that our stake represented a sizable opportunity cost during 2009. Further, let's say this up front: although we're typically long-term holders of our companies (*we've owned JCOM for almost two years), we are not opposed to reducing a position in favor of opportunities where we see greater upside.

In this regard, a fellow investor recently posited to us that JCOM might be a value trap because of uncertainty around what the company looks like in five to ten years. In addition, partial logic behind such a view might also be that, "well, since the share price has gone nowhere, it must be a dud!"

We acknowledged these concerns in our initial j2 post last July and appreciate the related question of whether it's better to own a business that will, with 100% certainty, be around in a decade doing exactly the same thing it does today (e.g. consumer packaged goods, beverages/food, railroad and/or hazardous waste companies we previously discussed).

In many sectors, such certainty does not exist -- from technology, communications, and Internet, to media/publishing/newspapers and even manufacturing. Things change. Thus, we must always consider risk factors that may turn a seemingly great business today into a defunct business tomorrow. Preferably, we own franchise type businesses with durable competitive advantages.

We remind ourselves that the market price for any stock is often not a reflection of a company's intrinsic value (although efficient market theorists would state otherwise). Notably, underlying fundamentals and results suggest that j2 Global is NOT a value trap: the company's eFax business remains stable while voice/email segments continue to grow. Moreover, j2 delivers steady Q/Q improvements in book value per share through increased retained earnings. In fact, retained earnings were up 32% Y/Y through 9/30/09 -- how many companies delivered this type of performance through a recession? We suspect not many.

Meanwhile, excess cash keeps accumulating on j2's balance sheet and now stands at 25% of the company's market capitalization. Further, unlike many cyclical companies throwing off huge free cash flow through inventory liquidation, j2's free cash flow is largely derived from net income because of the company's high margin business model (j2 has NO inventory, which we like!).

Finally, we met one-on-one with Scott Turicchi, President of j2 Global, last fall. Our meeting reconfirmed the following:
  • Competent, motivated, shareholder friendly management team that knows what they're doing and where they're headed (one significant caveat and risk factor they're aware of: the growth dynamic and adoption curve for voice/email services are different than those for digital fax services)
  • Despite negative secular trends, the fax business (~80% of revenue) can still grow as more businesses keep fax capabilities and look to outsourced IP fax offerings. Some businesses will keep fax service for daily use, others for "insurance" purposes in case necessary to communicate with customers.
  • Voice (~12% of revenue) and email (~3% of revenue) segments are growing and should become a larger piece of the pie over the medium- to long-term.
  • Large, consistent free cash flow generation (>$90 million per year) should continue with growth hinging on the economy and take-up of new products.
  • Priorities for excess cash ($220 million as of 9/30/09) remain (1) M&A and (2) share repurchase (although we suggested why not also pay a dividend). In both areas, management acts as value investors and always seeks a low price.
We'll come back in another post with brief discussion of how j2 might allocate excess cash.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long JCOM.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, January 11, 2010

China Exports Up: Easy Y/Y Compares, But We'll Take Them + Seaspan

A headline came across Yahoo! Finance (YHOO) yesterday that reveals another sign of stabilization and the inevitable move positive Y/Y comparisons for most sectors of the economy (which we've previously highlighted): "China overtakes Germany as biggest exporter after December exports rise 17.7 percent" (link here). A few interesting points from the AP article:
  • [China's] Exports for the last month of 2009 were $130.7 billion, data from the General Administration of Customs showed. That raised total 2009 exports to $1.2 trillion, ahead of the 816 billion euros ($1.17 trillion) for Germany forecast by its foreign trade organization, BGA.
  • Boosted by a 4 trillion yuan ($586 billion) stimulus, China's economic expansion accelerated to 8.9 percent for the third quarter of 2009 and the government says full-year growth should be 8.3 percent.
  • China surpassed the United States as the biggest auto market in 2009 and is on track to replace Japan as the world's second-largest economy soon. China passed Germany as the third-largest economy in 2007.
  • China's trade surplus shrank by 34.2 percent in 2009 to $196.07 billion, the customs agency said. That reflected China's stronger demand for imported raw materials and consumer goods while the United States and other economies are struggling and demand is weak.
  • Even though China overtook Germany as top exporter, the customs agency said total 2009 Chinese trade fell 13.9 percent from 2008.
We are pleased to see the uptick in exports, even off of easy Y/Y comparisons. While some market pundits and investors see China as the next bubble on the back of such huge government stimulus, we expect the trend will continue upward over the long-term. As with any forecast, the near-term is very difficult to predict. For now, at least, China is growing through the global downturn.

One way we expect to participate in long-term growth (both in China and abroad) is through an ownership position in container shipping company Seaspan (SSW). We we acquired shares in the company last year and still see a margin of safety at current levels. Although some see/call large container ships "barnacle magnets," we sleep well owning a piece of the critical global freight transportation network. Further, we like Seaspan because of the company's stable, REIT-like business model.

We will try to briefly share our SSW thesis in a future post. Please stay tuned.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO, SSW.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, January 7, 2010

Uh Oh, More Doom and Gloom Headlines....

We commented the other week that the widely held view that U.S. unemployment will remain high indefinitely appears inaccurate based on historical data. Still, no one seems to consider history and simply assumes the current state of affairs will continue.

A lead headline on Yahoo! Finance (YHOO) today reads: "Economists worry economy won't recoup 7 million lost jobs" - link here. The article opens with good news but then steers the reader toward the negative:
  • A two-year string of job losses appears to be near an end, if it hasn't ended already.
  • But most economists don't expect the employment picture to significantly improve anytime this year -- or over the next few years for that matter.
  • The unemployment rate, which stood at 10% in November, is expected to stay uncomfortably high for the foreseeable future. Some experts even suggest that the labor market won't be able to fully recover from the 7.2 million jobs lost since the start of 2008 before another recession and round of job losses.
While we understand times are tough and can't dismiss risk factors, we also try to live with our eyes wide open and consider both history and alternate, non-consensus view points. For interesting perspective on the Market, economy, and the consensus "new normal" view, we recommend reading Bill Miller's 3Q09 commentary (Chairman/CIO of Legg Mason Capital Management). While some discount Mr. Miller because of poor performance in recent years that ended his incredible winning streak of beating the market year after year, we believe he deserves respect and concur with his reasonable alternate economic perspective.

Yes, some job reductions continue and new hiring is tight, yet we see companies hiring:
  • Amazon (AMZN) appears to have more than 900 open jobs - link here.
  • Amazon Web Services, hub of "Cloud Computing" (seemingly everyone's favorite topic at present) appears to have perhaps 90 openings - link here.
  • Twitter has maybe 20 openings - link here.
And, "old economy" employers:
  • Kellogg (K) has appears to have 141 openings - link here.
  • Ford (F) has a number of openings - link here.
  • Johnson Controls (JCI) has 825 openings - link here.
Although the numbers may appear small relative to what was lost, we think baby steps are okay and see potential that many economists and mainstream media will, once again, be wrong (*recall how many said fallout from the real estate bubble would NOT lead to a recession).

Whenever more gloomy headlines come across, keep in mind many positive things that are happening: Internet traffic continues to grow like crazy (= rapid information flow/exchange, more productivity, new media forms, new business opportunities, etc.), E-Commerce holiday spending grew ~4% Y/Y per ComScore (SCOR), and even U.S. retail container port volumes are poised to increase (off easy Y/Y comparisons, but we'll take it). Indeed, we submit that life and business will progress amidst a relentless wall of worry.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Sunday, January 3, 2010

Who On Earth Needs Mediasite?... Did Your Firm or Organization Get the Memo?

As we enter 2010, we ask who on Earth needs Sonic Foundry's Mediasite? Our answer won't be a surprise if you've been following our Mediasite franchise thesis. As Webcasting becomes evermore pervasive, we submit that everyone can benefit from Mediasite -- from schools to corporations to government organizations to hospitals and all of their respective end-users.

Of course, there are a number of Webcast technologies and providers in the market, including Thomson Reuters (TRI), Nasdaq OMX's (NDAQ) Shareholder.com unit, PR Newswire's "MultiVu" /VideoNewsWire, ON24, TalkPoint, Veracast, Wall Street Webcasting, and Accordent. However, we suggest that comparing most solutions to Mediasite is akin to comparing apples and oranges. For those interested, here are some events captured with other solutions (registration may be required to view various Webcasts):
  • Limited Brands (LTD) hosted a "2009 Investor Update Meeting" on 10/27/09 -- link here (no registration required). The event was captured using PR Newswire's "MultiVu" /VideoNewsWire platform. PR Newsire is a subsidiary of United Business Media Limited.
  • Yahoo! (YHOO) hosted an Investor Day on Wednesday 10/28/09. Information is available here, including Webcasts captured by Nasdaq OMX's (NASD) Shareholder.com unit. We note that the morning after the event, we received the following unfortunate and untruthful message: "The live event you are trying to access has not started yet. Please try again at the announced time of the event" (untruthful as the event occurred the prior day). We presume the delay was related to post-production editing work, primarily manual slide synchronization with audio/video (viewing note: unfortunately, slides pop-up in separate windows = not optimal!) . We're patient investors (and analysts), yet there's no reason any presentation should be delayed for a day (or more) after a live event when Mediasite technology can make presentations available immediately post event (also better for "REG FD" purposes).
  • Vistaprint (VPRT) uses Adobe (ADBE) ConnectPro to deliver pre-recorded earnings presentations (audio/slides only - F1Q10 link here).
  • Nokia (NOK) hosted its annual "Capital Markets Day" on 12/02/09 -- link here. The event was captured by Thomson Reuters.
  • eBay's (EBAY) CEO John Donahoe presented on 12/07/09 at UBS's Global Media and Communications Conference - link here (audio/slides only). UBS used TalkPoint to capture the event.
  • Charles Schwab & Co. (SCHW) posts regular "Market Snapshots" using On24's platform -- latest from early December with Liz Ann Sonders, Chief Investment Strategist, can be found here.
  • Lastly, some companies use Cisco's (CSCO) WebEx solution. While WebEx may be optimal for group collaboration, we see the solution as suboptimal for lectures, town-hall-type CEO presentations, conference events, or any other one-to-many situation. Needless to say, we dislike the extraneous WebEx pop-up window that says "Playback in progress - Do not close this window, refresh this Web page, click Back or Forward, or click a URL in another window. If you do so, playback will end". Look familiar? Scary, right? As with post-event delays mentioned earlier, such a window and warning message are NOT necessary.
Thus, there is no shortage of competitive Webcasting solutions/providers, some of which look similar to Mediasite. Still, in most cases, Mediasite's strengths are readily apparent:
  • Ability to rapidly capture and publish content - any Mediasite Webcast capture is automatically synchronized (indexed) on the fly and, if desired, ready for on-demand playback immediately following the event. Most other solutions require manual/human post production (i.e. following the event, someone must manually tag/index each slide to the appropriate audio commentary, which takes time).
  • High resolution graphics with low bandwidth consumption.
  • Ability to capture and automatically integrate additional VGA content (beyond solely PowerPoint slides), including Web browsing and ancillary videos/commercials.
  • Superior end-user navigation and overall viewing experience (with new iPod-like playback available - see this link for info, samples).
  • Ability for end users to email presentations.
  • Solid catalog management on back-end
  • Mobile handset playback using Silverlight players (check with Sonic Foundry for information on this topic).
  • Integration with social networks.
Sonic Foundry hosted a Webinar last fall that featured Noble Financial in which the broker-dealer explained why they use Mediasite to capture all of their events:

Judging A Book By Its Cover: What Does Your Webcast Say About Your Event and Your Brand?

One of the slides included a quote from Wells Capital Management:

This is a true statement as Noble Financial is mostly alone among Wall Street users of Mediasite. Further, we've watched hundreds (thousands?) of Webcasts in recent years and concur with the comment from Wells Capital Management: Mediasite is a cut above all other solutions and current practice by Wall Street firms.

To-date, such events have not been Mediasite's bread and butter because of legacy relationships and technologies related to the aforementioned providers. For example, aside from close ties with financial services firms, many companies such as Thomson Reuters invested significant financial and human capital through the years to build the company's Webcast solution (StreamingMedia article here on this topic). Finally, there is a cost element, too, as including video adds incremental cost relative to audio/slide only conference presentations (although Mediasite can be used for audio/slide only event capture).

So, to come back to our initial question: who on Earth needs Mediasite? In our view, everyone stands to benefit, including providers such as Thomson Reuters, Shareholder.com, Wall Street Webcasting, Veracast, etc. Companies such as Limited Brands, Yahoo!, Vistaprint, eBay, Nokia, and Charles Schwab would also benefit (*as YHOO and EBAY shareholders, we think shareholder value would be enhanced by using Mediasite for corporate communications, internal and external). Importantly, end-users would also benefit through a more efficient and user-friendly delivery mechanism.

The wonderful news is that good things can't go unnoticed forever, which is why Autodesk (ADSK) relies on Mediasite for its annual Autodesk University and why Nestle used Mediasite for its annual nutrition symposium. We believe more persons are "getting the memo" and legacy relationships may be changing -- recall what Sonic Foundry relayed on the last conference call (text from TradingMarkets.com here):
  • "The events services business is beginning to see a resurgence in terms of interest and activity levels. This involves continued penetration in hotel, conference and exhibition markets. The teleconference sector is beginning to evaluate and utilize Mediasite services and offerings."
Although shares of Sonic Foundry fall into the speculative camp given no history of positive earnings or cash flow generation, we find valuation support in our private market value analysis. Further, we continue to see Mediasite developing into the global standard for rich media capture and Webcasting. As this occurs, Sonic Foundry's recurring revenue and services business component will keep building, much like a traditional software company, and operating leverage should arrive. While forecasting results for any company -- especially in the technology space -- can be perilous, we believe the earnings and cash flow inflection point should occur in fiscal 2010.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, YHOO, EBAY.

© 2009 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer