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Archive for November, 2009

Phoenix Technologies (PTEC): Is Another Rebirth Ahead?

November 26th, 2009 by Yehuda Fruchter   |   1 Comment

Phoenix Technologies (PTEC) definitely lives up to its name. Every few years the company is revitalized and then subsequently reduced to ashes by a greedy management team. Then from these ruins a new, Phoenix is born again under the leadership of a different cast of characters. This ability of multitudes of corporate vampires to rotate in and out of PTEC, is really testament to the tremendous underlying profitability of Phoenix’s BIOS or Core System Software business.

The good news for followers of the PTEC saga, is that with the stock now hovering at fifteen-year lows, PTEC may be ready for another rebirth.

What Has Changed: New Board Additions and Possible PC Demand Pick Up
What got me interested again in PTEC was the recent spat between Ramius (a large shareholder of PTEC) and management. Ramius was also involved with PTEC a few years back during the last revival, and now they’ve been scooping up lots shares again of PTEC at near current prices in attempt to gain control of PTEC and set it in the right direction. Just the other day, PTEC announced that it had reached an agreement with Ramius to appoint five new board members to PTEC from the Ramius slate.

Of course it’s obvious what Ramius sees here. A depressed stock price, a strong balance sheet, and a highly profitable core business (despite the company’s massive losses from write-offs and other non-essential expenses). At the same time, it’s possible that if the economic recovery is real, we could see a pick up in PC demand, especially considering the release of Windows 7.

If Ramius, now firmly in control of PTEC, can succeed in cutting some more fat from PTEC and if sales pick up even modestly given a slight industry rebound, PTEC should once again produce strong cash-flow. A change in financial fortune, with some renewed product hype, should provide the backdrop for a new growth story that would attract the attention of other stock gamblers and push up PTEC’s stock price.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in PTEC. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Incredimail (MAIL) Still Incredibly Mispriced

November 12th, 2009 by Yehuda Fruchter   |   No Comments

I first wrote up Incredimail (MAIL) back in July 2008, when the stock was at around $3, and sported a negative enterprise value. Since then MAIL has appreciated dramatically, as the company continues to report strong earnings growth, and perhaps more importantly return excess capital to shareholders via consistent dividend payouts. However, I still believe MAIL at current prices (current price: $8), is incredibly mispriced, and is one of the best values I can find in any Internet advertising business, both public or private.

Today, MAIL reported it’s Q3 results, which again exceeded estimates, despite what is seasonally usually a slow quarter. Management has already increased guidance for the year, and based on today’s number, and considering that Q4 is generally the strongest quarter for Internet advertising businesses, I am confident that MAIL will still exceed their current guidance for fiscal 2009. The numbers at MAIL are currently as follows: 9.8 million shares, zero debt, and and $26 million in cash (adjusting for the future dividend of around $4 million or $0.40 a share). This equates to an enterprise value of $50 million, set against EBITDA of $13 million+ estimated for this fiscal year, for an EV/EBITDA multiple of around 4.

This valuation appears to be extremely low for an online Internet advertising business that generates revenue via Google Adsense. My own personal opinion is that Google Adsense is one of the best businesses I’ve seen in a long time, since it requires nearly zero ongoing cap-ex, or incremental fixed costs. One simply monetizes website traffic via Google’s PPC program and receives payment from Google on a monthly basis. It is a veritable cash machine, as reflected in MAIL’s margins.

I find it interesting that the nature of GOOG’s monopolistic, and highly profitable, online advertising model is very apparent to investors in GOOG, as reflected in GOOG’s high valuation multiples. However, for some reason, companies, like MAIL, that actually generate the business for GOOG (i.e., the partner sites), remain at incredibly low valuations that are generally applied to old media companies with significant leverage and negative growth. I do not think this type of valuation discrepancy between GOOG itself and a major partner site, can last long, as MAIL would make for a very attractive acquisition for a larger Internet advertising business. I also believe that since management of MAIL has already proven themselves to be shareholder-friendly, that they will pursue some sort of value-enhancing transaction should MAIL’s stock price continue to trade at a depressed level.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in MAIL. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

The Key to a Successful Business: Courage or Crime?

November 10th, 2009 by Yehuda Fruchter   |   1 Comment

Every day I get a free inspirational quote from some famous writer or philosopher delivered to my email. It usually has nothing to do with business, and is a welcome intellectual reprieve from the daily economic grind.

Balzac vs. Drucker: Courage or Crime?

Today’s quote, however, was about business, and got me thinking. Here is the quote:
“Whenever you see a successful business, someone once made a courageous decision.” – Peter Drucker

Of course, given my inherent cynicism, I immediately counteracted this lesson from Drucker with that offered by the novelist Balzac:
“Behind every great fortune lies a great crime.”

A Lesson of Game Theory: It Pays to Defect

So what is the secret of success, courage or crime? After recently brushing up on my Game Theory with the book: The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life, I’d have to say that if its money your after, the secret to success must be the courage to commit a crime.

It seems clear, from a simplistic standpoint, that we are all better off on the whole for cooperating, and much worse off when we all defect (or cheat). However, each individual, in most business circumstances at least, is much better if he alone defects (i.e. cheats), and everyone else remains honest, i.e. cooperates. Of course, if you plan to cheat, you had better have alot of courage. It’s quite possible that the other party will detect your deceit, and refuse to continuing cooperating. At which point, everyone, including you, will lose big.

So you see the secret of successful business is to feign cooperation, and at the same time have the courage to defect/cheat. In that way, you secure yourself the biggest pay off. Despite the unpalatable result, there really is no other rational way of looking at the circumstances, as far as I can tell.

Buffet’s Investment Secret: Convince Others to Buy and Hold

You see this type of feigned cooperation, and secret defection, in investing all the time. The same people who extol the virtues of buy and hold, are trading like maniacs. More specifically, you have someone like Buffett warning against the dangers of derivatives (a short-term trading tool), and then generating humongous profits for his company Berkshire, from trading derivatives. So what is the truth? Does buy and hold work or does trading work? Should derivatives be banned or should they be used by financial companies to generate mythical profits?

The answer of course, as Buffett, learned a long time ago, is that the best way to profit is to convince everyone else to buy and hold (cooperate), while you busy yourself with trading against the cooperative trend (defect). That way when the shit hits the fan, you alone have liquidity to buy all the cooperators out.

Note: Of course the situation above, is obviously reprehensible to anyone, like myself, with any basic moral sense. This is why a society, like ours, which is so driven by material acquisition, must have strict rules in effect to promote cooperation, rather than defection. A problem arises, however, when the people making the rules are also animated by greed themselves, so that the social laws become part of the game of fake cooperation and hidden defection. It’s not clear to me how we as a society can escape from this dilemma. On an individual level, I guess, we are best served, for our own interests, in devising our own set of rules to promote cooperation. This will help us control our greed, and work for the good of society, rather than pursue our own selfish motives.

More Thoughts on the Vonage Mystery

November 10th, 2009 by Yehuda Fruchter   |   No Comments

After one has traded for some time, it becomes apparent that the biggest investment profits happen unexpectedly and are in retrospect not in the least bit correlated with underlying business conditions. The game of investment then becomes about positioning one’s capital in low-risk situations hoping for that unexpected success. Vonage typifies this investment strategy.

When I first bought the stock at $0.40, it seemed low risk, as there was no danger of imminent bankruptcy, and yet the stock was priced as if the company was already bankrupt. Then suddenly out of nowhere in late August, Vonage’s (VG) stock proceeded to climb up nearly 500% in a matter of days. Until the other day, I haven’t had a clue as to what caused this phenomenal rise, and naively I attributed it to some “market” discovery of the value inherent in VG’s stock. However, after reading VG’s 10Q, I have come to a different conclusion.

In the 10Q, VG says:

“From August 27, 2009 through September 8, 2009, we received Notices of Conversion from certain holders of our 20% senior secured third lien notes due 2015 (the “Convertible Notes”) indicating their desire to convert a portion of the Convertible Notes. The Convertible Notes were converted into shares of our common stock at a rate equal to 3,448.2759 shares for each $1,000 principal amount of Convertible Notes, or approximately $0.29 per share.”

Can it be a coincidence that VG’s stock started its meteoric climb about a week before Aug. 27th, and then peaked on August 26th, the day before VG was informed of the Notice of Conversion? I don’t think so. Since it is quite commonplace for convertible note holders to short the stock of the underlying equity for hedging purposes, it seems clear that VG’s convertible note holders were (and some still remain) short at least an equal amount of shares of VG (and likely much more), as the rate in which the notes convert. Surely, other funds recognizing the short pressure of the converts, played lemmings and shorted VG as well. As such when the decision was made to convert, a massive amount of shares needed to be covered, fueling an incredible rise in VG’s stock.

The question, of course, remains why the Convert Holders decided to convert when they did? Why exactly did they have to convert? Why not remain short VG equity and long the converts? I don’t really have an answer to these questions, except to say that apparently they no longer felt they should be hedged in VG. This implies that they foresaw greater upside, than downside, in a non-hedged equity position, then in a hedged convert. Given the preponderance of insider trading, you are free to interpret this statement, as you see fit.

As for myself, since I am currently still long some VG, I am naturally biased to bullish argument. However, I wonder whether the lack of artificial selling pressure from the convert overhang will help the price or will the lack of artificial buying pressure from short covering hurt the price? Or will new buyers emerge that actually believe in VG as an investment? As always, investing leads to circular reasoning and infinite loops of logic. The best hope is probably for another round of good luck!

High Unemployment is a Blessing for Banks

November 10th, 2009 by Yehuda Fruchter   |   No Comments

Ever since the government has announced record high unemployment numbers, the Market has been on a tear. Coincidence? Not really. Even though unemployment may hurt the production economy and damage our social fabric, nothing is better for the big banks than continued increases in unemployment. This again is because of the new economic law of our time, that I mentioned in a previous post: The greater the loss the greater the profit.

Rising Unemployment = More Bank Losses = More FREE Money from the Fed

Specifically in the case of unemployment, rising unemployment simply means more massive losses for banks on a host of credit products. These losses contribute to imagined fears of some sort of impending financial Armageddon, the fear of which forces the Fed/Treasury to print another few trillion dollars and give it to the banks for free. Nothing of course is more profitable than free money (just ask the folks at Goldman), so surely the big banks are rooting for continued high unemployment, and more financial losses.

Will the Profits of High Finance Support a Non-Working Economy?

Interestingly, the Fed and the Treasury have now perfected the art of printing money thru financial black holes, like AIG, FNM, and FRE, to support losses and award other government-sponsored beneficiaries. This shell game serves the purpose of obfuscating the true source of capital for big banks, and thereby averts a complete collapse of our economic system by maintaining the mirage that one needs to work to make money.

Nothing of course is farther from the truth. Work is the exact opposite of wealth in a finance-driven economy. There is no additional labor needed to print $1 trillion or to create a new $1 trillion derivative market. Finance operates in the realm of fantasy, not reality. As such, the amount of money available in financial capitalism, as distinct from production capitalism, is only limited by our imagination, which of course is unlimited.

The problem, however, is that as the cycle of big losses and continued free money handouts repeats a few more times, it may dawn on more and more people that perhaps the whole notion of employment in the economy is overrated. For why exactly does anybody really need to work if the Fed and Treasury can just print money and gives it to Goldman Sachs and other big banks to trade amongst themselves? Surely, as more money is printed, larger and larger financial profits and bonuses will be generated. At some point, this financial profit can then be recycled back into the economy to support the lifestyle of the 99.9% of the population that is unemployed.

Of course, if this fantasy world of finance would really work, at some point there won’t be anybody left to actually produce or service anything real in the economy. But, whoever said producing or making anything useful is important to an economy?

Vonage (VG) Delivers Strong Earnings Again

November 5th, 2009 by Yehuda Fruchter   |   Comments Off

I’ve received quite a few emails asking about Vonage’s (VG) results the other day. Here are my thoughts:


Vonages Stock Price Now Presents Two Classic Market Anomalies That Generally Reward Patient Investors
I remain completely baffled by the tendency of the Market to emphasize non-cash accounting results over cash-flow metrics. In addition, I do not quite understand why the Market, in many instances, focuses on present quarter results, as opposed to underlying business trends that will influence future financial results.

I will not attempt to explain these irrationalities here, other than to say I’m grateful that the Market displays these irrationalities and therefore provides a means of generating investment profits. It should be obvious that the underlying free cash-flow and the future expectations of a business, are the only important factors in determining the equity value of an enterprise. As such, when the Market focuses on non-cash accounting charges and magnifies business results that reflect the past, rather the future, there is quite likely a profitable investment opportunity for those with patience.

In the case of Vonage, the company’s recent results are a classic example of the above two-mentioned Market anomalies, i.e. a focus on meaningless accounting metrics, and a focus on the past, instead of the future.

Vonage’s Underlying Cash-Flow Continues to Improve Despite Reported Accounting Losses
Despite the fact the Vonage reported a major accounting loss for the quarter due to a non-cash charge related to the embedded derivative associated with Vonage’s convertible issue, the truth is that the accounting loss was completely non-cash and unrelated to the important financial metrics of the company, all of which improved sequentially (Note: Sequential growth is far more important than year-over-year growth, though Vonage offers both at this point).

The true measure of a company’s value is, of course, the underlying free cash-flow, which I define as EBITDA – Interest Expense – Taxes – Cap Ex. Since VG will never pay any taxes in our lifetimes, given its huge tax loss carryforwards, VG’s cash-flow is simply EBITDA – Interest Expense – Cap Ex. This figure is easily tallied from the company’s 8-K.

EBITDA for the quarter was $33 million, up dramatically year-over-year and also an increase sequentially. Interest expense was listed at around $14 million. Cap-Ex was said to have been $9 million. Applying some basic math, yields a free cash-flow number of $10 million or $0.05 per share, using the roughly 200 million diluted outstanding share feature. This equates to an annualized free cash-flow per share of $0.20 (Note: annualizing this number is justified, and probably even too conservative, due to the non-seasonality and improving sequential business/financial trends at the company). At current prices, this equates to a FCF yield of nearly 15%. Whether that FCF yield is attractive, is of course, dependent on the tastes of each individual investors and other investment alternatives, but I honestly have not recently found many businesses yielding this type of FCF for equity investors.

It also pays to note that VG’s free cash-flow is somewhat understated because of the company’s absurdly high interest rate on its current debt issues. Recent improvements in the credit markets imply a potentially much lower interest rate on debt for a company like VG. Though it may prove difficult, I believe a refinancing of the company’s “loan shark” debt will happen in due time, and a lower interest rate will dramatically increase free cash-flow. However, even without a refinancing, investors still need to calculate the effects of a lower interest rate, when valuing VG, since any potential acquirer of VG would surely make this calculation in determining a takeover price for VG. Obviously, a larger company would quickly replace VG’s current debt with new paper at much lower interest expenses.

Vonage’s Underlying Business is Showing Renewed Momentum
Of course, present financial results for a company are also meaningless, unless one believes that underlying business trends at the company are stable and hopefully improving.

In the case of Vonage, however, the business trends at the company are getting better. The issue with Vonage is that the new products that the company launched, were only available for part of the third quarter, so that the results of the quarter did not fully reflect the positive contributions of these new products. Notably, the company’s new Worldwide Plan, started late in the 3rd quarter, has been very successful, as detailed in the company’s press release (i.e. churn greatly lowered, referrals increased, ARPU up etc.). Interestingly, despite the fact that commentators will harp on VG’s loss of 50K customers this quarter, the reality is that this is a dramatic improvement from the 80K loss last quarter, and the new customer trends indicated in the press release imply a net gain of subscribers next quarter. Finally, I remain confident, as well, that the company’s imminent launch of new Mobile Worldwide Plans, will also be positively received, and help to further renew subscriber growth and reduce churn.

The positive effects of Vonage’s new products will, of course, only be evident in future financial results over the course of the next year. Smart investors should always anticipate the future, and sell on the future expected positive news, rather than react to current news and past events.


In sum, it appears to me that Vonage’s financial results and business metrics continue to show improvement, despite the obfuscation of accounting results and the timing of new product launches. Since the company’s stock price has yet to reflect these seemingly obvious positive developments, as well as other potential value-enhancing events, it seems that the stock still presents an excellent investment opportunity. I suspect that as the company’s accounting financial results become more transparent in future quarters, additional new products are launched, customer growth returns, and the speculation regarding the refinancing of the company’s debt and/or an acquisition by a larger company surface, that the stock price will increase dramatically.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in VG. We first wrote up VG at $0.40. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.