01 Communique Laboratory Inc -
01 Communique Laboratory Inc. (OONE-CDN) -- Speculative BUY recommendation from Jones, Gable & Company Limited
01 Communique Laboratory Inc OONE
Shares issued 19,400,100 1999-10-08 close $0.66
Tuesday Oct 12 1999
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JONES, GABLE & COMPANY LIMITED Research Report
Tel: 416-362-5454 Sept. 1999
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01 Communique Laboratory Inc. (OONE-CDN)
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01com.com
Recommendation: Speculative BUY - for risk tolerant, small cap investors
Market Statistics
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Shares outstanding: 19,400,100
Public Float: 10,400,100
Options: 1,900,000 at $0.50, expiring
between February 2001 through
December 2006, to directors,
officers and employees
Fully diluted: 21,300,100
Market price
(September 22, 1999): $0.60
Current Market
Capitalization: $11.6 million
52 week range: $0.75 - $0.20
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Based on our forecast for fiscal 2000, the stock is trading at 1.1X revenue and 7.3X earnings. We believe that a multiple of 3.5-4.0X annualized 3rd quarter revenue is supportable, given the historical and anticipated growth of the Company. This would suggest a target stock price range of $1.31 to $1.49. Applying a multiple to forecast F00 earnings of 15-20 times indicates a target price range of $1.24 to 1.65.
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01 Communique Laboratory develops, manufactures and markets fully integrated PC telephony, Internet and fax communication software. The Company was formed in 1992 to pioneer a new generation of communication software products for users of personal computers and to exploit the demand for fully integrated and easy-to-use communications solutions on a worldwide basis. The key driver underlying the Company's strategy is the recent convergence of telephone, Internet and wireless communication with the personal computer. Their primary markets include single users, small office/home office (SOHO) users and other small LAN environments. The Company's Communicate! family of products enable the user to handle all of their telephony, fax, video, paging, voice mail, e-mail, Internet and contact management requirements with a single solution using a common interface.
HIGHLIGHTS
Excellent product design and functionality.
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01's lead product, Communicate! Pro is very well regarded by software reviewers for its design and functionality. The user interface is attractive and intuitive with its main screen display presented as a conventional telephone handset with buttons to access features. Unlike many communication software products it is designed for the segment known as the "rest-of-us".
Communicate! Pro with its array of features replaces the conventional telephone answering machine, fax machine and ancillary hardware like voice/fax detectors and caller ID boxes. In addition it adds considerable functionality above that of competing telephony/fax software solutions. Communicate! Pro's features include:
* speaker-phone
* multiple user defined targeted greeting capability
* call screening/call display (screen and voice)
* logging of calls inbound and outbound
* call recording
* remote access to all telephony/fax features and voice messaging
* fax or e-mail broadcasting
* rerouting of voice mail messages to other parties phones/cell phones and rerouting of faxes to e-mail or E-mail to faxes, all on an automatic, user defined basis
* automatic voice/fax recognition
* full multi-featured faxing capability
* fax-on-demand/fax-back services
* pager dispatching
* Internet telephony
* multi-feature contact manager
The Communicate! line is currently available in 10 languages: English (US and UK versions), German, French, Italian, Portuguese, Spanish, Dutch, Chinese (Traditional), and Chinese (Simplified). In addition, the product has been fully localized by one of 01's partners, Hitachi, for the Japanese market.
Enhancements are continually being made to functionality, ease-of-use and the user interface. Patches incorporating enhancements are available via download from the Company's web site.
Communicate! Pro supports newly emerging access technologies such as cable, xDSL, ISDN and intranet, as well as support for full range of Windows implementations, including Windows 95/98 and Windows NT 4.0 and coming support for Windows 2000.
Communicate! Pro has been tested by a number of independent parties and is reputed to be "bug-free". The most typical problems encountered involve modem incompatibility. This is not considered a software problem but is a function of the huge variety of modem makes and models on the market. The Company is continually challenged to stay abreast of new model introductions and modifications. Regardless, most difficulties can be overcome with a phone call to 01's customer support.
The Communicate! line has received various awards and favourable reviews from magazines such as Windows Magazine and CTI Magazine. Recently, Communicate! Pro was named Pick of the Week for Windows 95/98 by Microsoft and Wugnet (Windows User Group Network - the oldest and largest independent online organization supporting the various Microsoft operating system environments). Furthermore, several key OEM partners and distributors have commented very positively on the level of service and support offered by 01 as well as the innovative nature of the product.
Highly coherent strategy to grow
company that is advancing successfully.
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The Company's strategy is to become a dominant provider of communications software and to ultimately penetrate the corporate market for communications/telephony solutions. The Company initiated this strategy by developing a superior product offering for the single-user oriented, retail and OEM market, which it has now successfully penetrated. This approach has permitted the Company to develop numerous OEM relationships worldwide and build a large distributor/retail base which has allowed the Company to achieve considerable mind-share and brand strength for the Communicate! line. It has also provided a solid and growing revenue base (approaching $7 million for F99) to support the continuing R&D and marketing effort to bring products to the SOHO and corporate markets.
Significant new product pipeline.
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01 has a brisk schedule of new product releases slated to begin in the fourth quarter of 1999.
The first of these, Communicate! i2000, a SOHO or small business edition is currently in Alpha/Beta and is expected to be launched at the Las Vegas Comdex show in November, 1999. Based on Communicate! Pro it will feature a new interface and over 300 enhancements, including Intranet support, audio and video mail, support for Internet video-conferencing, multi-line capability (up to 4 modems simultaneously) and personal directory service. Marketing and distribution will focus on the existing retail channel and the development of a value-added reseller (VAR) channel.
Scheduled for release in mid fiscal 2000, 01 is developing a home network edition - Communicate! HNE. This product, similar in functionality to Communicate! i2000, is being designed for home networks allowing multiple PC's in a home to share Internet access, phone books, log books, etc. A similar product for small office networks - Communicate! SNE (Small Network Edition), is scheduled for release at the same time.
Another product, slated for release in early to mid 2001, is the Communicate! iServer. This is an Internet telephony server product that will be the step to enter the corporate world and could also provide the opportunity to licence to the wide bandwidth ISP providers, i.e., cable. iServer will allow the IT department of a company to set up communications from their corporate web site, allowing employees to access Communicate! features via a PC-based Internet browser. This product could allow 01 to begin pricing on a per user or seat basis to a significantly large population of potential users and could provide a revenue breakthrough.
Successful track record in building
distribution channels - significant North
American retail proliferation and worldwide OEM presence.
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The Company has been notably successful to date in building distribution channels for a narrow product line oriented towards the consumer/retail market. The consumer software market is replete with examples of excellent products that never really see the light of day due to the difficulty of attracting distributors and retail shelf-space.
The Communicate! product line is carried by all the major software distributors in North America including Ingram-Micro and Tech Data, and is now offered in over 3,400 retail stores including Office Max, Staples, CompUSA, Best Buy, Future Shop and Computer City. It is also carried by the major US catalog retailers such as Micro Warehouse. The Company has recently added Dixons, a major UK chain and is talking to other European retailers.
According to PC Data's Retail Software Report for the 12 months ended February 28, 1999, 01 has about 33% of the retail market for communications/telephony software. This market share is expected to grow as the Communicate! line is believed to be the only truly "Unified Messaging" solution and has a much wider range of functionality than its competitors.
This retail presence has contributed to the development of OEM channels. In the OEM channel, modem manufacturers typically bundle a "lite" version of Communicate! that is upgradable by the ultimate purchaser. The Company receives a small amount of revenue per unit shipped. In some cases the Company bundles a full version for a greater unit revenue share or a full version subject to 30-day trial, whereby the consumer can buy a licence to retain ("unlock") the product. The costs associated with bundling are typically absorbed by the modem manufacturer.
While the Company currently receives a significant amount of revenue from OEM deals, this revenue as a whole, is not expected to grow in line with OEM shipment growth as per-unit OEM revenue is trending down for commodity grade modems which are an increasing percentage of the shipment mix. Per-unit revenue for 01's higher end modem customers is, however, more stable and should continue to grow in line with shipments. Proliferation of the commodity grade modem channel is still, nevertheless, very positive from a market/mind share perspective and the generation of upgrade and retail sales.
The Company has deals in place with many modem manufacturers and to date has shipped over 4 million units. A significant number of new OEM deals have been signed recently, however it will take time for these accounts to ramp up as the Company is often displacing other software companies requiring the modem manufacturers to wait for existing agreements to expire and to phase in new customer support regimes. 01 continues to pursue deals with other major modem manufacturers.
According to Peter Davidson Consulting, a US based consultancy, affiliated with the leading IT firm, International Data Consultants (IDC), 01 will have approximately 7% of the worldwide unified retail deals and expected additions to this base, Davidson believes that 01 has the potential to obtain a 15 to 20% market share by 2002. Davidson Consulting was recently hired by an institutional investor in 01 to conduct a due diligence market study.
Large and rapidly growing
worldwide market for communications software.
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According to Davidson Consulting, the unified communications software market should grow from 64 million units in 1999 to 112 million units in 2002, with OEM and retail segments, currently at 63 million and 1.1 million, respectively, growing in consistent proportions. In the 2002 to 2004 time frame, the market for unified messaging and telephony servers offering the kind of functionality embodied by the Communicate! line, should outgrow the PC-based communications software market. This could dramatically increase the market opportunity for 01.
Strong revenue base, profitability and capitalization assists in supporting significant new product pipeline.
Revenue for the 9 month period ended July 31, 1999 was $5.1 million, up 74% over the same period last year. The annualized revenue run rate based upon the third quarter is now in excess of $7.2 million and is expected to continue ramping up as some of the recently signed OEM deals begin shipping and the retail channel expands. The revenue mix is approximately 50% OEM and 50% retail. Gross margins, overall, are in the 95% range. Net income for the recent 9 month period was approximately $1 million. With these numbers the Company is able to partially support its new product pipeline which should offer even greater potential going forward.
01 had approximately $1.5 of working capital as at July 31, 1999, no long term debt and no drawings on their bank line of $750,000. Subsequent to July 31, 1999 the Company received a loan from the BDC for $500,000 to further support the launch of Communicate! i2000 and other R&D efforts. There is a modest royalty component implicit in this loan and there is a loan prepayment option.
The Company will look to further finance the development and launch of its new products and will likely look to a combination of debt and equity sources as market conditions permit.
Highly experienced and proven management team.
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01 has an extremely high quality management group that has proven that they can execute the Company's strategy. We believe that they have the depth and ability to build 01 into a dominant industry competitor.
Andrew Cheung, President/C.E.O. and director - Mr. Cheung was one of the founding shareholders of 01. In 1986, while still a student, he founded AMA Computers, a company in the business of importing computer accessories and assembly of computer systems. AMA grew to over $7 million in revenue before Mr. Cheung sold his interest in 1992. He has a Computer Science degree (B.Sc. Hons) from the University of Western Ontario (1986) and is a Certified NetWare Engineer.
Brian McElwain, Vice President of Sales and Marketing - Mr. McElwain has an excellent track record in the high-tech industry with extensive sales and marketing experience. Prior to joining 01 in 1995, he was Vice President, Sales for Pure Data Ltd., a Canadian manufacturer of commercial modems and networking products. From 1990 until 1994, he was the Vice President, Sales for ATI Technologies (ATY-TSE). Prior to this, he spent 22 years at Honeywell, rising to the level of Vice President of Sales for Canada. He has a Bachelor of Arts in Math and Actuarial Science from the University of Toronto (1966) and has completed post-graduate studies in Computer Science (1968).
Brian Stringer, C.A., Chief Financial Officer - Prior to joining 01 in 1998, Mr. Stringer was the C.F.O. of Pure Data Ltd. Prior to this he held senior financial positions with other companies in the high tech as well as the property and casualty insurance industries. He has a business degree from York University (1975) and received his Chartered Accountant designation in 1977 while at Ernst & Young.
Management and employees have significant shareholdings.
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Directors, management and entities under common control with certain members of management hold or control a total of 9,000,000 shares or 47% of the Company. In addition, many of the employees of 01 are either shareholders or have options.
Valuation
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On a product offering basis, the only directly comparable public companies to 01 are Smith Micro (SMSI-Nasdaq) and Symantec (SYMC-Nasdaq). Smith Micro is a close comparable and is currently trading at a revenue multiple of about 2.0X its most recent quarter, annualized. SMSI recorded a loss for the first half of 1999 of about 1.4 million on revenues of 6.1 million. This loss partially reflects costs related to promotional campaigns in their retail and OEM channels. Revenues have declined from over 22 million in 1996 to 9.5 million in 1998, although they have turned up somewhat this year, albeit with a considerable loss, partly related to heavy promotional rebates in their retail channel.
Symantec is less comparable as it is much larger and has unrelated products in its line-up in addition to its directly competitive product. SYMC currently trades at a revenue multiple of 2.9X its most recent quarter, annualized, and a forward P/E multiple of 19.1X. Revenue growth at SYMC was 27% in the recent quarter over last year and 11% for F1999 over 1998.
In Canada there are two companies that, although not directly comparable, provide some guidance as to valuation of 01.
MGI Software Corp. (MGI-TSE) produces digital media editing software for sale through retail and OEM channels. MGI trades at about 9X annualized recent quarterly revenue (July 31/99). Recent quarter sales of 5.4 million are ahead of last year by 75%, but the company is not profitable at this time. MGI is somewhat more established than 01 and has shipped over 26 million units of its product compared to 01 at 4 million units. Still, 01 could be at this level within a year or two based upon expected growth and the fact that Communicate! possibly addresses a more ubiquitous market, namely communications versus photo and video editing.
Janna Systems Inc. (JANA-CDN) produces Customer Relationship Management (CRM) software for the corporate market. Janna currently trades at about 4.3X annualized recent quarterly revenue (Jun 30/99) and about 23X estimated 1999 earnings. Recent quarter sales of 4.5 million are ahead of last year by 99%. We believe that Janna would trade at higher multiples if it was traded on a more senior exchange, a factor that also affects 01.
By contrast, 01 is currently trading at about 1.6X third quarter annualized revenue and 9.7X forecast F99 (October 31 year-end) earnings. Revenues have grown rapidly with F99 expected to be 75% ahead of F98 and F00 forecast to be 50% ahead of F99.
Based on our forecast for fiscal 2000, the stock is trading at 1.1X revenue and 7.3X earnings. We believe that a multiple of 3.5-4.0X annualized 3rd quarter revenue is supportable, given the historical and anticipated growth of the Company. This would suggest a target stock price range of $1.31 to $1.49. Applying a multiple to forecast F00 earnings of 15-20 times indicates a target price range of $1.24 to 1.65.
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FINANCIALS
01 Communique Laboratory Inc.
($000's)
Forecast Forecast Actual
12 months 12 months 9 months
31-Oct-00 31-Oct-99 31-Jul-99
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Revenue $10,500 $7,000 $5,091
Cost of sales 525 315 198
Gross profit 9,975 6,685 4,893
% 95.00% 95.50% 96.11%
Selling, general
and administration 6,275 4,385 3,086
Research and development,
net of tax credits 1,800 900 699
Other expenses 300 200 99
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Net income $1,600 $1,200 $1,009
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% 15.24% 17.14% 19.82%
Net income per share $0.083 $0.062 $0.052
Revenue multiple: 1.1 1.7
Earnings multiple: 7.3 9.7
Actual Actual Actual
12 months 12 months 12 months
31-Oct-98 31-Oct-97 31-Oct-96
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Revenue $4,003 $1,765 $371
Cost of sales 305 291 51
Gross profit 3,698 1,474 320
% 92.38% 83.52% 86.31%
Selling, general
and administration 4,955 3,069 1,312
Research and development,
net of tax credits 609 376 244
Other expenses 32 127 45
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Net income ($1,898) ($2,098) ($1,281)
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% -47.40% -118.83% -345.66%
Net income per share ($0.100) ($0.150) nm
Based on:
Current share price $0.60
Market capitalization $11,640,060
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Risks
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Despite the many strengths of 01, a number of risks and challenges exist which bear mentioning. These include:
* the potential of competing products from larger existing companies with more established brands and greater resources.
* the normal risks associated with new product development and launch.
* the challenges associated with the management of continuous rapid growth.
* the ability to maintain revenue levels and/or attract financing to continue product development and market penetration.
* market disruptions due to Y2K problems not directly related to the Company but nonetheless having an impact on the Company's markets.
* the risk that earnings could be reduced and possibly become negative in order to maintain the pace of development and to properly launch the products in the pipeline. The Company's primary objective is to keep products such as the Communicate! iServer on target so as to capitalize on the larger perceived potential of these products.
In addition, there are approximately 5 million shares held by approximately 30 individuals for which a statutory hold period expired on September 27, 1999. These shares were mostly acquired at a cost of $0.50 in 1995/6, prior to the IPO. Some risk exists that these shares may come into the market over the next while causing some pressure on the stock. We believe that some of this stock may have come into the market already. Nevertheless, the existence of this potential stock overhang could present an ideal time to buy the stock.
Conclusion
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01 has established itself as a significant player in the integrated communications software industry, worldwide. Growth has been rapid and profitably executed by a strong management team. We have a great deal of confidence in the ability of management to continue to build retail and OEM presence and to develop and profitably launch the new products in the pipeline.
Accordingly, we recommend 01 Communique as a speculative buy for risk tolerant, small cap investors.
R.N. Goodwin CF * 416-365-8002
Jones, Gable & Company Limited
The opinions contained herein are those of Jones, Gable & Company Limited ("JGC") as of the date hereof and are subject to change without notice. JGC makes every effort to ensure that the contents herein have been compiled or derived from sources believed reliable. However, neither they nor the opinions expressed herein are warranted by us to be accurate or complete. This publication is not, and under no circumstances is to be construed as an offer or solicitation to buy or sell the security mentioned in Canada or the United States. JGC and its respective officers, directors or employees ("the JGC group") may from time to time acquire, hold or sell securities mentioned herein as principal or agent. The JGC group currently holds shares of 01 Communique. In addition, JGC has provided financial advisory services to 01 Communique for consideration including a fee and a limited time right of refusal for financings.
The following persons have an interest, directly or indirectly, to the extent of not less than 5% of the capital of JGC: D.M. Ross, J.D. Gunther, J.E. Sharpe and A. Phillips.
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01 Communique Laboratory Inc. (OONE-CDN)
01com.com
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