Small cap tech year end review 2011


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Small cap tech year end review 2011

  1. 1. SMALL CAP TECH YEAR-END REVIEW   December 14, 20112011 SMALL CAP TECH YEAR-END REVIEW AND 2012 OUTLOOKAfter a tumultuous 2011 where equity values were primarily driven by macro-economic and political events, we enter 2012 with more cautionthan we did entering 2011. The incessantly pessimistic perspective from Europe, which dominated the second half of 2011, has begun toaffect the performance of some of our small-cap coverage list. Stocks with global footprints that rely on CAPEX budgets from their clientbase appear to be facing headwinds during H1 2012. There is increasing evidence that projects milestones are being delayed, scaled back, oreven cancelled as big spenders conserve cash in the face of Euro debt crisis uncertainty. As a result, we see a slow start to 2012, followed bya stronger finish.Somewhat surprisingly, we are seeing some evidence that the US economy is experiencing an up-tick in both employment and confidence(both business and consumer). As a result, we believe that performance risk for US consumer-facing stocks may decline in 2012.We see the most upside in stocks that rely less on CAPEX budgets, and tap less macro-economic sensitive OPEX budgets through multi-yearterm licenses, or transactional licensing.Although we believe that the general market should show more strength in H2’12, our near-term perspective is cautious with OPEX overCAPEX, US consumer over Euro enterprise.TABLE OF CONTENTS 2011 Small Cap Tech Year-End Review and 2012 Outlook ............................................................................... 12011: Two Years in One ............................................................................................................................... 2 H1’11: US Employment Trends Fuel Optimism ...................................................................................... 2 H2’11: “The Emporers Have No Clothes” Crushes Confidence Starting in August ................................ 32012: Mirror Opposite of 2011 as Long as Europe Does Not Implode................................................................ 3 Pessimistic H1’12; Optimistic H2’12 ....................................................................................................... 3 Canadian Tech Balance Sheets Remain Solid Entering 2012.................................................................. 4 RES 30 Performed Well during FY’11 > 15% LTM Growth of Top and Bottom Line............................... 4Coverage List 2012: CAPEX Caution and OPEX Optimism................................................................................. 5 Continuing Macro Technology Themes for 2012 ................................................................................... 6 Risks and Rants for 2012......................................................................................................................... 7Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  2. 2. SMALL CAP TECH YEAR-END REVIEW   December 14, 20112011: TWO YEARS IN ONE NASDAQ Composite Index OPTIMISM PESSIMISM 3.00k 2.90k Euro crisis: Greece 2.80k 2.70k 2.60k 2.50k 2.40k Japan: 9.1 magnitude earthquake, Tsunami & Fukushima End of QE2 2.30k Euro crisis: Italy Debt ceiling debate 2.20k 11 01 1 15 1 30 1 1 g- 011 1 28 1 1 l-2 1 1 08 1 15 1 1 -1 11 11 13 1 24 1 1 20 1 1 18 1 11 - 2 11 10 1 1 1 01 1 01 1 ay 201 1 01 1 1 Ju 2 01 1 01 1 1 1 No - 20 No - 20 20 No -20 Ap - 20 Fe -2 0 20 20 Ap -2 0 Ju -2 0 Ju -20 20 Ja - 20 Fe - 20 20 Ju -2 0 Se -20 -2 Au -2 -2 -2 -2 4- - 5- 2- 6- - 2- 8 22 01 0 03 6 1 06 -0 -1 -1 l-1 -0 -3 v- v- v- g- r- r- b- b- n- n- p- p- n- n- ct ct ar ar ar ay Au Se Ja O O M M M M MH1’11: US EMPLOYMENT TRENDS FUEL OPTIMISM   M Partners entered 2011 with an BUY HOLD SELL optimistic outlook for its technology coverage universe 5 - 1     First quarter 2011 was characterized by cautious optimism that the recession of 2008 was finally in the rear-view mirror. The Federal Reserve forecasted US GDP growth to reach 3.5% while the US economy continued to benefit from active stimulus like QE2. US unemployment dropped below 9% in February for the first time since May 2009, and trended to a two-year low in March 2011. Optimism was reflected by elevated market liquidity reaching all the way down to the Canadian technology small cap and micro-caps, which were, for the first time since 2007, demonstrating healthy levels of trade volumes – especially in February. LTM Liquidity Trends 400,000 $300,000 Avg Volume Avg Value 350,000 $250,000 Nov 111,290 $ 132,880 300,000 Dec 134,177 $ 118,684 $200,000 Jan 202,324 $ 175,066 250,000 Avg Daily Volume Feb 371,723 $ 279,524 Mar 215,502 $ 220,864 200,000 $150,000 Apr 242,405 $ 226,909 150,000 May 229,690 $ 203,622 $100,000 June 147,062 $ 124,683 100,000 July 101,961 $ 91,915 $50,000 Aug 94,305 $ 71,021 50,000 Sept 82,712 $ 64,049 Oct 93,897 $ 61,453 0 $0 Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Nov 106,235 $ 69,081 Source: Capital IQ, M Partners Avg Volume Avg Value The NASDAQ index peaked on February 17 at 2,831 after running up from 2,691 at the beginning of the year. In general, technology stocks benefited from elevated enterprise investments in productivity, a surge in consumer smartphone adoption, an acceleration of the emergence of the mobile web, and more emphasis on the cloud. There were capacity stresses within the mobile ecosystem, which stocks under coverage (InterDigital (IDCC-NASDAQ), Sandvine (SVC-TSX), Bridgewater Systems (BWC-TSX), and Redknee (RKN-TSX)) were forecasted to benefit from directly. Optimism in Q1 was reflected in the “risk on” trade, which priced the RES 30 Canadian Small Cap Tech Index ahead of the main TSX/S&P index on an EV/EBITDA basis. Essentially, investors were interested again in growth stocks and technology growth in particular. On March 11, 2011 a 9.0 magnitude earthquake and tsunami hit Japan a few hundred kilometers north of Tokyo. Riveting images of the utter destruction and then the slow motion Fukushima nuclear disaster consumed world attention and helped to erase the year-to-date gains on the NASDAQ. More importantly for the technology sector, intermittent power disruptions, evacuations, and the sheer size of the disaster combined to disrupt parts supply chains for electronics ranging from iPhones to data servers. The disaster impacted directly on the performance of two companies under coverage. IDCC suffered reduced royalties from per-unit Japan-based customers such as Sharp and Kyocera. Sandvine performance was impacted by delays at NTT and component shortages for some of its server hardware.Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  3. 3. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011H2’11: “THE EMPERORS HAVE NO CLOTHES” CRUSHES CONFIDENCE STARTING IN AUGUST The remarkable recovery by Japan from the earthquake and tsunami, along with solid Q2’11 corporate earnings, helped to return the NASDAQ to a 52-week high of 2869 in mid-July - just three months after the post-tsunami correction. QE2 ended in June. By May, the US unemployment rate had climbed back above 9.0%, peaking at 9.2% in June. The unnecessary and unnecessarily nasty US debt ceiling debate revealed how ineffective the polarized US Congress has become in prioritizing budget policies to help sustain economic growth, increase employment, and help boost consumer confidence. Market disappointment at US Congressional intractability was reflected in a 17% decline of the NASDAQ index over a period of only two weeks. Just as it became clear that the United States Congress was essentially dysfunctional, the Euro Debt Crisis suddenly became more acute as Greek bonds were downgraded and it appeared more likely that, despite two years of austerity, Greece was at risk of defaulting on its debt and creating a contagion of disorderly default within the Euro Zone. Markets essentially ignored positive earnings fundamentals and whipsawed with debt crisis announcements from dithering European Union officials. Governments in Greece, Italy and Slovakia fell as a direct consequence of elevated policy risk. At this time, the Euro debt crisis has entered its 19th month, and remains the single greatest risk to global financial systems and driver behind depressed equity values. September – crisis on; indices down. October – crisis off; indices up. November – crisis on, indices down. In the meantime, US employment fundamentals have recently shown improvement to the best levels since the early stages of the employment fallout of the 2008 financial crisis. These positive data points are overshadowed by the Euro crisis, although they may be supporting a small up trend in the volatile indices. For the first time during FY 2011, the Euro crisis is impacting the performance of our coverage list. Regardless of market segment, all companies under coverage that rely on Capital Expenditures (CAPEX) to fund contracts have reported delays in both orders and project milestones. The root cause of most of the project delays appears to be related to uncertainty in the financial markets, and the risk of future access to capital. Stocks impacted by CAPEX spending restraints include Redknee (RKN-TSX), VIQ Solutions (VQS-TSX), Sandvine (SVC-TSX) and International DataCasting (IDC-TSX). We believe that each of these companies has sufficient net cash to adjust to reduced client CAPEX spending for multiple quarters. On an equal weighted basis, 25% of the mean percentage of market cap is covered by cash among these four stocks.2012: MIRROR OPPOSITE OF 2011 AS LONG AS EUROPE DOES NOT IMPLODEPESSIMISTIC H1’12; OPTIMISTIC H2’12   M Partners enters 2012 with a cautious BUY HOLD SELL outlook for its technology coverage universe 7 3 1     Due to severe austerity in several Euro countries, some of Europe is probably in recession right now. Trade imbalances between Euro countries in recession and Euro countries expanding economically are at once masked by the monetary union, and exposed by individual sovereign bond yields. Because the US Federal Reserve, in concert with other G20 central banks and the European Union, is actively promoting systemic liquidity, we think that chance of a “Lehman Bros 2” financial meltdown resulting from the Euro debt crisis is in the lower quartile of possibility. We believe that a recession in Europe could be relatively shallow and short due to ongoing central bank activism. However, evidence suggests that stocks under coverage, which rely on CAPEX budgets, should experience at least one more quarter of reduced performance. Commentary from recent quarterly conference calls has common themes, which we have contemplated in FY’12 estimates: o Minimal year-end budget flushing; o Multi-quarter delays to some project milestones; o Sequential quarterly delays (Qt1 delays picked up in Qt2 but offset by Qt2 delays); and o Project re-scoping. Decelerating CAPEX appears to be connected to market uncertainty and fear among heavy CAPEX spenders such as network operators directly related to the Euro debt crisis. It is not all bad for stocks under coverage. Holiday activity, an uptick in employment and an apparent stabilization of US home prices have made American consumers slightly more optimistic and apparently less sensitive to Euro Zone risks entering 2012. As a result, we believe that stocks with exposure to consumers, and in particular US consumers, are less risky than they were earlier in 2011.Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  4. 4. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011 We also believe that stocks with term or transactional licenses and exposure to operational budgets (OPEX) are a good spot to be in the short-term or until large networks feel more comfortable spending CAPEX. Ten of the eleven technology stocks that are under coverage are small cap and should continue to be impacted by low liquidity during H1’12. We believe that as the Eurozone risk recedes in the new year, and optimism for the US economy improves, investors may begin to return more meaningfully to equity markets. We think that the “risk on” trade should create more liquidity and less discounted valuations for small cap technology stocks during H2’12. The technology sector should also be impacted positively during 2012 by a backlog of high profile IPOs that were delayed in 2011. A long-rumored Facebook IPO could result in more investor interest in the entire sector, which could positively impact small cap technology stocks by H2’12. CANADIAN TECH BALANCE SHEETS REMAIN SOLID ENTERING 2012 TSX Tech Company Totals Market Cap ($M) Cash ($M) Cash as % of MC Large-Cap 9 > $1B $ 30,344 $ 3,556 11.7% Mid-Cap 5 >$0.5B<$1.0B $ 3,240 $ 697 21.5% Small-Cap 35 >$50M<$0.5B $ 6,009 $ 1,421 23.6% Micro-Cap 74 >$5M<$50M $ 1,432 $ 310 21.7% TOTAL 123 $ 41,025 $ 5,985 14.6% Source: Capital IQ, M Partners Of the 123 companies in the technology group of the TSX and TSXV worth over $5M, all but 14 companies are considered to be small cap or micro cap stocks. Approximately 21.7% of aggregate small cap market cap value is in cash, which implies two things: o In general, small cap technology companies are well fortified against future market shocks. o Investors do not value the current and future cash flows generated by the operations. The size of the group continues to contract, exiting 2012 with approximately ten fewer listings. Since the beginning of the year, several small cap companies have been acquired including Bridgewater Systems, MOSAID, Zarlink, and March Networks. Combined, these companies represent approximately $1.4B of shareholder value. Two significant technology IPOs occurred in the Canadian technology sector. In May, NexJ raised $43.7M and then in November, Avigilon raised approximately $20M in a public offering. RES 30 PERFORMED WELL DURING FY’11 > 15% LTM GROWTH OF TOP AND BOTTOM LINE The M Partners RES Small Cap Tech Index tracks the overall performance and liquidity of 30 companies which we believe are most  representative of the state of the 123 companies with market capitalizations between $5M and $500M that comprise the Canadian Small Cap Technology Sector (see Appendix A). These 30 companies are covered by at least three equity analysts and therefore provide us with a consensus view of forward looking multiples. We also report on the overall performance and liquidity of the larger group of 123 technology companies that comprise the sector, along with related transactional activity. Revenue, EBITDA & Cash Growth RES 30 ($M) 11/30/2010 11/30/2011 Change LTM Revenue $4,791 $5,585 16.6% LTM EBITDA $559 $646 15.7% Cash & Equiv. $1,120 $1,226 9.5% S&P/TSX ($B) 11/30/2010 11/30/2011 Change LTM Revenue $981 $1,048 6.9% LTM EBITDA $183 $204 11.9% Source: Capital IQ, M Partners *Includes Mood Media, which replaced Bridgewater Systems   The RES 30 index grew revenues by 16.6% and delivered nearly $800M of new revenue over the last twelve months. As well, the group increased LTM EBITDA by 15.7%, generating about $90M of aggregate EBITDA growth over the same time period, showing earnings leverage and massively outperforming the general economy, which improved by roughly 2%, as measured by GDP. Revenue, EBITDA & Cash Growth Cash as % of Market Capitalization RES 30 ($M) 11/30/2010 11/30/2011 Change RES 30 ($M)* 11/30/2008 11/30/2009 11/30/2010 11/30/2011 LTM Revenue $4,791 $5,585 16.6% LTM EBITDA $559 $646 15.7% Aggregate Cash $787 $957 $1,109 $1,208 Cash & Equiv. $1,120 $1,226 9.5% Aggregate Market Cap $3,380 $4,820 $6,094 $6,532 S&P/TSX ($B) 11/30/2010 11/30/2011 Change % of Market Cap 23.3% 19.9% 18.2% 18.5% LTM Revenue $981 $1,048 6.9% Source: Capital IQ, M Partners LTM EBITDA $183 $204 11.9% Source: Capital IQ, M Partners *Excludes Bridgewater Systems & Mood Media, 29 companies included *Includes Mood Media, which replaced Bridgewater Systems   Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey Lobsinger Participating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228 Member – Canadian Investor Protection Fund (CIPF)
  5. 5. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011 RES 30 Segmented by Market Capitalization No. Total MC ($M) Total Large Cap 0 > $1B $ - Total Mid-Cap 3 >$0.5B<$1.0B $ 1,907 Total Small-Cap 23 >$50M<$0.5B $ 4,799 Total Micro-Cap 4 <$50M $ 115 30 $ 6,820 Source: CapitalIQ, M Partners November 1st to November 30th Performance RES 30 -5.0% LTM Performance RES 30 -3.4% Coverage List -6.4% S&P/TSX -7.2% S&P/TSX -0.4% Coverage List -19.8% 4.00% 40.00% 2.00% 30.00% 0.00% 20.00% -2.00% % Return 10.00% -4.00% -6.00% 0.00% -8.00% -10.00% -10.00% -20.00% -12.00% -30.00% Nov-07-2011 Nov-21-2011 -14.00% Jan-12-2011 Jan-26-2011 Jun-03-2011 Jun-17-2011 Jul-01-2011 Jul-15-2011 Jul-29-2011 Dec-01-2010 Dec-15-2010 Dec-29-2010 Feb-09-2011 Feb-24-2011 Mar-10-2011 Mar-24-2011 Apr-07-2011 Apr-21-2011 May-06-2011 May-20-2011 Aug-12-2011 Aug-26-2011 Sep-12-2011 Sep-26-2011 Oct-10-2011 Oct-24-2011 1 1 1 07 1 1 1 1 1 1 1 1 1 1 1 22 1 1 1 1 1 1 1 01 01 01 1 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 No 2 01 No -2 0 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 1- 01 02 03 04 08 09 10 11 14 15 16 17 18 21 23 24 25 28 -3 v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- v- ct No No No No No No No No No No No No No No No No No No O RES 30 S&P/TSX Coverage List RES 30 S&P/TSX Coverage ListSource: Capital IQ, M Partners Source: Capital IQ, M Partners The Euro Crisis added more uncertainty to worldwide markets during November, resulting in a significant decline in the performance of all categories of stocks. The full-year performance of the RES 30 and the M Partners coverage list has followed the market.COVERAGE LIST 2012: CAPEX CAUTION AND OPEX OPTIMISM Exiting 2011, our recommendations have become more cautious as we have had an opportunity to dissect performances of five reporting companies over the past two weeks. Recommendation Market Data EV/EBITDA Multiples Liquidity % Chg. Target Market Comp Medians Avg Daily Target Implied Share 30-Day 365-Day Market Cap Market Data and Valuation Rating Prior S/O Ent. Value Volume (Last Price Return Price Chg. Chg. (M) FYE FYE+1 FYE FYE+1 FYE FYE+1 Close Week) Coverage List InterDigital, Inc. (NasdaqGS:IDCC) $118.00 BUY 175.6% $42.81 -1.5% -5.5% 21.5% 45.5 $1,947.64 $1,487.05 29.6x 14.8x 9.0x 4.5x 10.6x 9.7x 805,180 Descartes Systems Group Inc. (NasdaqGS:DSGX) $10.00 BUY 40.6% $7.11 -1.1% -3.4% -1.0% 62.3 $443.05 $380.12 16.9x 13.1x 11.5x 8.9x 17.3x 13.9x 34,730 TeleNav, Inc. (NasdaqGS:TNAV) $14.00 BUY 65.9% $8.44 1.0% -6.8% 22.3% 41.3 $348.27 $155.05 6.7x 6.0x 2.7x 2.4x 4.5x 4.6x 127,260 Sandvine Corporation (TSX:SVC) $1.40 HOLD 16.7% $1.20 -34.8% -34.1% -57.4% 137.9 $165.47 $90.38 29.2x 12.5x 22.3x 9.6x 16.0x 12.7x 194,900 Redknee Solutions, Inc. (TSX:RKN) $1.70 BUY 78.9% $0.95 -4.0% -17.4% -34.5% 64.0 $60.83 $56.20 38.9x 8.6x 21.0x 4.7x 15.4x 12.6x 227,420 GuestLogix Inc. (TSX:GXI) $0.50 SELL 25.0% $0.40 1.3% -7.0% -55.6% 64.8 $25.93 $20.74 4.5x 5.2x 3.4x 4.0x 5.3x 3.5x 28,750 PNI Digital Media Inc. (TSX:PN) $2.40 BUY 192.7% $0.82 0.0% 2.5% -50.3% 34.2 $28.08 $25.06 21.3x 10.3x 6.7x 3.2x 9.0x 6.1x 31,730 VIQ Solutions Inc. (TSXV:VQS) $0.30 HOLD 9.1% $0.28 0.0% 0.0% -38.9% 90.3 $24.83 $23.29 20.3x 7.3x 18.5x 6.7x 8.9x 7.9x 36,330 Cyberplex Inc. (TSX:CX) $0.15 HOLD 76.5% $0.09 -5.6% -26.1% -81.9% 133.8 $11.38 $34.10 8.8x 5.5x 7.0x 4.4x 8.7x 6.9x 142,160 Vendtek Systems Inc. (TSXV:VSI) $0.80 BUY 146.2% $0.33 0.0% -14.5% -18.8% 52.5 $17.07 $13.22 NM 8.5x NM 3.0x 6.8x 6.0x 16,960 International Datacasting Corporation (TSX:IDC) $0.40 BUY 53.8% $0.26 -10.3% -13.3% -7.1% 60.4 $15.71 $8.46 27.0x 6.7x 13.5x 3.3x 8.4x 7.1x 11,570 In July InterDigital (NASDAQ:IDCC, BUY - $118.00) announced that it had hired Barclays and Evercore to review strategic options regarding its patent portfolio. InterDigital represents the best event-driven trade within our coverage list. Investors remain anxious that a transaction conclude soon. Uncertainty has weighed on the stock price because the company is not communicating any progress related to the process. However, the timeframe is still within the range of recent similar transactions. If the process does not conclude by year- end 2011, we believe that the company will need to either conclude the process or communicate progress prior to its next quarterly performance report in mid-February. Descartes Systems Group (TSX:DSG, Q-DSGX, BUY - $10.00) remains our top fundamental pick. With 93% recurring revenue, EBITDA margins near 30%, and between 15% and 20% annualized growth, the fundamentals are very similar to SaaS providers in other business to business sectors. DSG is priced more like a logistics provider and sits at a 31% discount to the median multiple of its peers. TeleNav (NASDAQ:TNAV, BUY - $14.00) already has global automotive deals with Ford (live) and a deal with Delphi (we think this is Volkswagen/Audi), which will go live in 2012, and it has almost 30 million mobile users with traction in Latin America and with China Mobile. It trades at an EV/EBITDA discount to its peers which we think is unwarranted. Within our coverage list, Telenav is one of the least impacted by CAPEX risk and has nearly $5.00 CPS.Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  6. 6. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011 PNI Digital (TSX:PN, BUY - $2.40) has made several significant deals with major retailers including Rite-Aid, Walgreens, Costco Canada, and Tesco that have doubled its end locations from 14,000 to 27,000. Revenues ($24M FY’11E) are essentially 100% recurring and benefitting from the re-emergence of US consumer confidence. We do not believe that the recent catalysts are priced into the stock. Redknee (TSX:RKN, BUY - $1.70) Although Redknee has disclosed in a recent investors call that it has experienced delays, we believe that with over 40% recurring revenue and a new emphasis on term-based contracts that it should perform well on a relative basis to its peers in 2012. A large channel deal is expected to be announced at the World Mobile Congress in February which may not be priced into the stock. Sandvine (TSX:SVC, HOLD - $1.40) warned of a significant miss for Q4’11 revenues and earnings. Sandvine is sensitive to CAPEX fluctuations and, due to its emphasis on channel relationships, has limited visibility into contract risk. It can ride out the project uncertainty of H1’12 because it has $75M of cash, or $0.54 CPS, zero debt and 300 sticky customers. Cyberplex (TSX:CX, HOLD - $0.15) announced Q3 guidance that projects 10% to 15% sequential growth, after having come to a resolution with its lenders in September. There is a lot of uncertainty heading into 2012 regarding its relationship with Yahoo!, and the potential impact on its business model of rumored M&A activity. The Yahoo! relationship represents approximately 80% of its revenue and all of its profitability. Guestlogix (TSX:GXI, SELL - $0.50) announced disappointing earnings which included disclosures that the company still has yet to earn meaningful revenue from merchandising programs that is has spent over two years designing and piloting with airline clients, and that revenue has decreased in part due to airline clients renewing at lower minimal guarantees, which we believe is indicative of a lack of pricing power. As we enter 2012, there are still no meaningful announcements that will contribute to the $3.0M of incremental quarterly revenue promised by management. Investors do not care about micro-caps with game changing catalysts. Even as companies execute toward game changing catalysts, share price and volumes have declined since the beginning of the summer. Despite significant growth opportunities, most of the smaller companies on our coverage list were hit particularly hard by adverse capital market conditions during the past few months. Investors fear another liquidity trap similar to the one experienced in 2008. In addition, these companies are also experiencing CAPEX spending delays related to the Euro debt crisis. International Datacasting (TSX:IDC, BUY - $0.40), VIQ Solutions (TSXV:VQS, HOLD - $0.30) and Vendtek Systems (TSXV:VSI, BUY - $0.80) are executing towards significant catalysts, although each of their catalyst paths have slowed due to CAPEX spending risks. Although there are project delays, these stocks remain buys because lack of liquidity has weighed on the share price. Each of these companies is profitable and earnings multiples are discounted to peers by between 35% and 50%. Combined net cash balances represent over 20% of combined market cap, so there is minimal balance sheet risk. CONTINUING MACRO TECHNOLOGY THEMES FOR 2012 Convergence of the living room: This is a continuation of a theme from 2011 and a dream by Apple, Microsoft and Google for a few years. As the cloud has matured, the converged living room is more possible than ever and there may be a game changer launched in 2012. Whatever happens, competition for the household wallet will heat up among networks and content providers. We are watching TransGaming (TSX:TNG, not rated) in this market. The consumerization of the enterprise: Increasingly, we are seeing BYOD (Bring Your Own Device) strategies being employed by large enterprises. This could have profound impact on enterprise device sales and could help accelerate adoption of tablets. More importantly, we may see more consumer-oriented term and transaction licensing models that are enabled by cloud-based infrastructure. We think that Descartes Systems Group is well positioned to benefit and, due to its transactional business model, is increasingly attractive to major enterprise software vendors such as SAP and Oracle among others. Mobile broadband: Most global networks are at various stages of deploying 4G LTE network upgrades during 2012 and we should see the first broad shipments of 4G devices during the year – probably about 6 months ahead of adoption patterns forecasted as late as 2010. 4G LTE adoption will benefit IDCC directly as long as it can sign up licensees in a timely manner. Broadband needs are being driven primarily by video, which represents approximately 60% of all data. Sandvine is staking claim on video packet management, and it should drive Sandvine’s performance by H2’12. Handset patent war: Exiting 2011, most mobile device manufacturers are engaged in multiple global patent disputes. There are several dozen current actions being fought simultaneously. The war, we believe, is about future gross margins on devices as devices become commoditized. With the most valuable 4G/LTE patent portfolio available for sale, shareholders of InterDigital could benefit from a significant windfall as a direct result of the patent war. Location-based everything: Location is a new mobile computing variable that has been deployed with various levels of success so far. We see 2012 as demarcation point where the category matures. Improved services combined with maturing business models could result in improved performance by category vendors. Telenav runs the gamut of LBS services, and is poised to deliver a fully integrated mobile-to-auto navigation system this coming summer. Data security, processing security and user privacy: Although the nuisance of everyday spam has been contained, there have been several high profile hacking events, and cyber attacks so far during 2011 which is putting an emphasis on the category for 2011. Content discovery and curation: How does someone find the right app out of 500,000 on the iOS platform? How does someone find a great song out of the millions available. More importantly, how do content creators and distributors make money? These areas ofMember of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  7. 7. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011 opportunity could be prominent during 2012. We believe that PNI Digital Media is positioned well in the printing market. We are watching Mood Media (TSX:MM, not rated) in this market. Massive IPOs: the market is anticipating massive IPOs led by Facebook, which could provide a liquidity shot for the whole sector. RISKS AND RANTS FOR 2012 Although there are solid and interesting trends continuing in the technology sector, and small cap tech seems to be performing particularly well (15% YoY growth in revenue and earnings) in the face of H2’11 headwinds, we are detecting some temporary slowing entering FY’12. We have attempted to incorporate uncertainty in both our forecasts, and our relative multiple valuations, although we believe that after a muted H1’12, there should be a return to higher trajectory growth in H2’12. This growth is dependent upon two main trends: 1) a shallow and quick recession in Europe 2) continued employment recovery in the United States. However there are a few events that could derail our forecasts: The partial or complete collapse of the Euro-zone: Although there are some immediate tactical responses to the debt crisis that could be beneficial, there is no resolution to the impact of the trade imbalances among members. The ongoing debt crisis could result in the dissolution of the European monetary pact, which could create disorderly default of multiple European economies, extending and deepening the recession that Europe is probably already in now. Even with extensive intervention by central banks elsewhere, disorderly European defaults could send the world into an economic depression. Chinese economic growth moderating: exiting 2011, commentary from the region hints that growth is moderating and rumors of speculative real estate bubbles persist. Recent easing of capital requirements for domestic banks hints at accommodation. Combined with a European recession, weakness in China could impair growth in H2’12. US policy risk: Without meaningful tax reform and budget prioritization, there are two impending risks that could derail recovery in the United States. If congress is unable to extend employee payroll tax cuts then we see US consumer demand drying up again as the shrinking US middle class pulls back on discretionary spending. Similarly, if the US government deploys austerity measures on top of state and municipal austerity, we see risk that recent increases in employment could be reversed temporarily. The bottom line is that after several quarters of balance sheet repair, the US consumer is starting to feel slightly better and beginning to spend disposable income. Tax increases and job cuts would kill the “green shoots” of US consumer demand, possibly sending the US economy back into recession. Iran: Iran is turning into the single greatest risk to world security. A major escalating event in 2012 related to Iran could disrupt energy supplies, and stress the finances of fragile European and American economies for 2012 and possibly beyond. Aging population: As people get older they tend to spend less and save more. Europe, Japan and North America are getting older. In the United States, the largest cohort of people as percentage of the total population is getting prepared to retire over the next five years. These folks make up 80% of the 1% and about 60% of the net assets of the country and they are not spending much of it. Although aggregate demand is increasing from cohorts under 55 years of age, it is a weaker engine than in previous decades, and it is still very leveraged. The bottom line is that the top-heavy demographics have sidelined a lot of wealth that would otherwise help drive stronger demand and higher levels of employment during 2012, which would otherwise help the US economy to better withstand economic risk elsewhere in the world.Member of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  8. 8. SMALL CAP TECH YEAR-END REVIEW   December 14, 2011 APPENDIX A – RES 30 INDEX Valuation Multiples TEV/EBITDA Cash & LTM LTM Current FY TEV/LTMCompany Name Ticker Share Price Market Cap TEV Equiv. Revenue EBITDA LTM Current FY FY+1 P/E RevenuesWi-Lan Inc. (TSX:WIN) TSX:WIN $5.60 $692.0 $657.8 $188.2 $92.2 $69.2 9.1x 9.0x 7.0x 9.4x 6.9xMOSAID Technologies Inc. (TSX:MSD) TSX:MSD $45.95 $547.7 $431.8 $107.0 $80.6 $32.1 13.4x 13.0x 11.9x 21.9x 5.4xComputer Modelling Group Ltd. (TSX:CMG) TSX:CMG $14.30 $527.7 $484.4 $43.3 $54.4 $28.5 17.0x 16.3x 14.3x 25.8x 8.9xZarlink Semiconductor Inc. (TSX:ZL) TSX:ZL $3.99 $499.8 $454.1 $130.7 $227.0 $34.1 13.5x NM NM NM 2.0xDescartes Systems Group Inc. (TSX:DSG) TSX:DSG $7.07 $440.6 $373.0 $76.2 $111.3 $31.2 13.1x 11.1x 9.5x 14.2x 3.6xEXFO Inc (TSX:EXF) TSX:EXF $5.98 $361.3 $295.4 $22.8 $269.7 $34.5 8.8x 7.5x 5.2x 15.1x 1.1xMood Media Corporation (TSX:MM) TSX:MM $2.69 $342.4 $810.7 $18.1 $282.6 $64.5 12.1x 8.8x 5.6x NM 2.8xGlentel Inc. (TSX:GLN) TSX:GLN $15.85 $352.7 $353.9 $14.7 $570.4 $60.3 5.9x 5.9x 5.1x 10.6x 0.6xSierra Wireless Inc. (TSX:SW) TSX:SW $6.68 $209.1 $105.1 $100.7 $598.2 $19.0 5.3x 4.1x 2.8x 54.7x 0.2xGennum Corporation (TSX:GND) TSX:GND $5.77 $205.2 $184.8 $20.8 $135.9 $34.0 5.6x 4.8x 3.6x 10.7x 1.4xSandvine Corporation (TSX:SVC) TSX:SVC $1.84 $253.7 $180.3 $1.8 $99.2 $5.0 36.6x 25.9x 10.3x NM 1.9xAastra Technologies Ltd. (TSX:AAH) TSX:AAH $14.30 $200.5 $82.9 $114.3 $712.1 $54.0 1.5x 1.8x 1.6x 11.1x 0.1xAbsolute Software Corporation (TSX:ABT) TSX:ABT $4.47 $192.6 $139.9 $32.6 $71.4 $11.3 11.9x NM 11.5x NM 1.9xPeer 1 Network Enterprises, Inc. (TSX:PIX) TSX:PIX $1.68 $202.9 $261.9 $3.5 $118.0 $26.3 9.6x 7.6x 6.2x 165.1x 2.1xRuggedCom Inc. (TSX:RCM) TSX:RCM $14.79 $183.1 $142.6 $39.0 $107.5 $18.4 7.5x 7.5x 5.7x 19.4x 1.3xMediagrif Interactive Technologies Inc. TSX:MDF $14.76 $202.3 $167.2 $35.3 $49.8 $16.5 10.1x 8.6x 6.8x 19.0x 3.4xSoftchoice Corp. (TSX:SO) TSX:SO $8.85 $175.6 $139.5 $44.0 $983.7 $49.5 2.7x 2.7x 2.3x 7.0x 0.1xPure Technologies Ltd. (TSX:PUR) TSX:PUR $2.54 $124.5 $103.8 $20.7 $45.0 $1.0 107.1x 91.2x 5.9x NM 2.3xMiranda Technologies Inc. (TSX:MT) TSX:MT $8.85 $192.6 $169.5 $40.1 $176.7 $34.5 4.9x 4.5x 4.0x 9.3x 1.0xCOM DEV International Ltd. (TSX:CDV) TSX:CDV $2.14 $163.0 $163.0 $34.8 $204.8 $28.7 5.7x 5.2x 4.2x 11.9x 0.8xDragonWave Inc. (TSX:DWI) TSX:DWI $4.37 $155.3 $85.9 $62.2 $66.8 -$21.6 NM NM 4.5x NM 1.3xRedknee Solutions, Inc. (TSX:RKN) TSX:RKN $1.10 $70.4 $63.3 $15.5 $60.1 $2.6 70.5x 6.9x NM 12.7x 1.1xAxia NetMedia Corp. (TSX:AXX) TSX:AXX $1.18 $75.5 $51.1 $14.8 $76.2 $14.7 3.6x 3.3x 2.5x 14.2x 0.7xVecima Networks Inc. (TSX:VCM) TSX:VCM $3.02 $67.4 $66.3 $7.8 $78.2 -$11.9 NM 19.9x 10.4x NM 0.8xZedi, Inc. (TSXV:ZED) TSXV:ZED $0.53 $51.5 $59.6 $0.9 $72.2 $7.9 6.7x 4.6x 3.3x 11.4x 0.8x20-20 Technologies Inc. (TSX:TWT) TSX:TWT $2.60 $48.9 $42.6 $11.6 $67.5 $6.1 7.3x 6.0x 4.7x 29.2x 0.7xEnablence Technologies Inc. (TSXV:ENA) TSXV:ENA $0.06 $28.0 $38.4 $10.0 $30.3 -$4.9 NM NM NM NM 1.3xWebtech Wireless Inc. (TSX:WEW) TSX:WEW $0.26 $27.4 $22.4 $5.1 $40.9 -$2.1 NM 91.3x 9.2x NM 0.5xGuestLogix Inc. (TSX:GXI) TSX:GXI $0.45 $29.2 $25.0 $7.7 $25.2 $1.2 20.3x NM 3.0x NM 1.0xCyberplex Inc. (TSX:CX) TSX:CX $0.09 $11.4 $34.1 $2.2 $77.3 $1.8 18.8x 7.0x 4.4x NM 0.4xSource: Capital IQMember of the Investment Industry Regulatory Organization of Canada (IIROC) Analyst: Ron Shuttleworth Associate: Kelsey LobsingerParticipating Organization – Toronto Stock Exchange (TSX) 416.603.7381 ext. 250 416.603.7381 ext. 228Member – Canadian Investor Protection Fund (CIPF)
  9. 9. M|PARTNERS Toronto Vancouver 100 Wellington Street West 1080 Mainland Street Suite 2201 Suite 409 Toronto, Ontario Vancouver, British Columbia M5K 1K2 V6Z 3E3 Canada Canada T: 416-603-4343 T: 604-687-0755As a full-service investment bank, M Partners’ first priority lies in the financial satisfaction of its clients. In keeping with the firm’s self-imposed highstandards, M Partners’ approach to investment is anything but standardized. Aiming to create new opportunities and ideas for clients rather thansteering them towards typical investment outlets, M Partners has adopted a keen strategy of focused and relevant research. Such knowledge-drivenefforts, coupled with the ample skills of the firm’s management, produces successful services ranging from account management to advisoryengagements.M Partners received Investment Industry Regulatory Organization of Canada (IIROC) approval on April 14th 2005 and trades under broker number 97.The team currently has 40 members of varying degrees of financial experience, including principals Thomas Kofman and Steve Isenberg, who have acombined 45 years of financial experience and are well known in the field. This backbone of strong leadership will help chart the firm’s course into thefuture. In the coming months and years, M Partners will be focusing on a number of verticals, including environmental and infrastructure, real estate,mining, merchandising and consumer products, and other special situations.M Partners has strong financial backers who have extensive capital markets experience. The firm is a member of IIROC, a participating member of theToronto Stock Exchange, The TSX Venture Stock Exchange, PURE, CHI-X, OMEGA, TMX and the Canadian Investor Protection Fund (CIPF).M Partners does not make a market for an equity or equity related security of the subject issuer.DisclosureThe particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. Theopinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy orsell the securities mentioned herein.Disclosure codes are used in accordance with Policy 3400 of IIROC.Description of Possible Disclosure Codes1. M Partners or its affiliates collectively beneficially own 1% or more of any class of equity securities of the company which is the subject of the research report.2. The analyst or any associate of the analyst responsible for the report or public comment hold shares in the company.3. M Partners or a director or officer of M Partners or any analyst provided services to the company for remuneration other than normal investment advisory or trade execution services within the preceding 12 months, (may seek compensation for investment banking services from the company herein within the next 3 months).4. The director, officer, employee or research analyst is an officer, director or employee of the company, or serves in an advisory capacity to the company.5. The analyst has viewed the material operations of the company. We define material operations as an issuers corporate head office and its main production facility or a satellite facility that is representative of the companys operations.6. M Partners provided investment banking services for the company during the 12 months preceding the publication of the research report7. The analyst preparing the report received compensation based upon M Partners investment banking revenues for this issuerDisseminationAll final research reports are disseminated to institutional clients of M Partners simultaneously in electronic form. Hard copies will be disseminated toany client that has requested to be on the distribution list of M Partners. Reproduction of this report in whole or in part without permission is prohibited.Research AnalystsThe Research Analyst(s) who prepare this report certify that their respective report accurately reflects his/her personal opinion and that no part ofhis/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views as to the securities or companies. MPartners compensates its research analysts from a variety of sources and research analysts may or may not receive compensation based upon MPartners investment banking revenue. Rating System Summary of Recommendations Buy: Price expected to rise As of September 30, 2011 Sell: Price is inflated and expected to decrease Buy 42 93% Hold: Properly priced Hold 2 5% Speculative Buy: Price expected to rise; material risk to the investment exists Sell 1 2% Under Review: Not currently rated Total 45 100% M|PARTNERS Research • Trading • Advisory