Full text of YORKTON:
Q1 Results; Maintaining US$25 Target; Reducing Recommendation to Hold
EVENT: Diversinet has announced its financial results for the first quarter of
fiscal 2000. The company reported revenue for the quarter of $319,000.
COMMENT: The loss per share in the quarter was $0.14 compared with a loss of$0.15 in the previous quarter and a loss of $0.05 in the prior year. Although
the company reported one-time revenue in the last quarter, we do not expect
Diversinet to begin to generate consistent revenue until the second quarter of
F2000. The quarterly loss was above our expectations because of higher general
and administrative expenses and higher depreciation and amortization expenses.
Overall, the company's conference call was disappointing in that it did not
provide any significant new announcements regarding forward progress on the
business plan. The majority of the questions during the call came from private
investors with very few institutional investors participating in the
discussion. Diversinet's responses to investors' questions were at times vague
and indirect.
The financial website, TheStreet.com, published an article yesterday profiling
a number of alleged issues with Diversinet's business. The article drew
attention to Diversinet's abilities in terms of having its technology included
in a product that is put into full-scale production. Concerns were raised
regarding the significance of the company's relationship with Research In
Motion (RIM, TSE). A quote from RIM CEO Jim Balsillie was put in the context
that Diversinet was not a major strategic partner for RIM. Diversinet addressed
the TheStreet.com article in the conference call, denying the allegations that
were raised and stating that they were very disappointed with the article.
During the quarter, Diversinet signed new agreements to license the Digital
Passport Certificate Server to a number of companies: i3Mobile (formerly
Intelligent Information), Digital Signature Trust and SmartServ. The company
also finalized a number of letters of intent with Aether Systems and SensCom
for the licensing of Diversinet's technology. The revenue reported in the
quarter was related to a number of customers: RIM, i3Mobile, SmartServ and
Nortel Networks (NT, TSE). The company did not provide any details as to the
nature or timing of the revenue. Diversinet continues to maintain a strong
balance sheet, with $10 million in cash available to cover its monthly expenses
of $750,000. During Q1, the convertible debenture holders converted their
holdings into common stock, leaving Diversinet debt free.
In F2000, the company will focus on broadening its customer base and installing
Diversinet technology in as many devices and applications as possible. The
company is in the process of hiring sales, marketing and business development
staff for the European market, with an office to open in London during Q2. We
believe that Diversinet is currently the only company with a wireless
end-to-end solution, but there are signs that the market will become
increasingly competitive and we expect a number of companies to offer
competitive solutions in the near term.
CONCLUSION: We are maintaining our F2000 and F2001 revenue estimates of $2.3
million and $11.9 million, respectively. As the timing and terms of existing
and new agreements become more evident, our F2000 revenue number may be
revised. The lack of financial detail makes it difficult to assign precise
values to the agreements and contracts, especially with respect to potential
service revenue. Given the current high valuation on the stock, we are not
confident that Diversinet can maintain its current share price. We are
increasingly skeptical about the company's prospects in the near term and are
eagerly awaiting the results of the existing pilot projects. We are reducing
our recommendation from Speculative Buy to Hold and maintaining our US$25
target.
Yorkton Securities Inc. has acted as agent for financing of or financial
advisor to Diversinet Corp. within the past three years. |
