Microforum patiently plots U.S. strategy
Microforum Inc MCF
Shares issued 30,385,737 2000-01-21 close $12.55
Monday Jan 24 2000
SEARCHING FOR THE SIZZLE, WARY OF THE FIZZLE
by Stockwatch Business Reporter
Microforum Inc., a Toronto-based electronic commerce and Internet services firm, is once again drawing some attention from investors looking for a promising Internet and technology play. Microforum hit a 52-week high of $14.05 on Jan. 20 before ending the day at $12.90 with just over 2.8 million shares changing hands, the sixth most active issue on the Toronto Stock Exchange.
Little more than a year ago Microforum was a battered video game software company with dim prospects and fading market interest. A restructuring during 1998 saw a change of direction toward the Internet and electronic commerce and a change of leadership, with Howard Pearl taking over as president in November following Micoforum's acquisition of his company, PPL Marketing. At the time, Microforum shares were hovering in the neighbourhood of 40 cents.
Following the changes, Microforum began to focus on electronic commerce solutions offered through its wholly owned subsidiary Internet Frontier. Among its early clients were Petopia.com, billed as the most comprehensive pet-commerce site on the Internet, and Ford of Canada. By February of 1999, the company had secured its third Internet project for Ford, developing and implementing a section of the Ford of Canada Web site to promote the Ford Focus. The relationship with Petopia was also extended during 1999. Among its more recent Internet projects, Microforum received a Web site development contract from Chapters Online in December.
In March of 1999, Microforum completed the acquisition of Software Guaranty, moving the company and its Cyber Active Lending Measurement System (CALMS) under the Internet Frontier umbrella. CALMS is a Web-enabled credit origination solution claimed to allow a credit application to proceed from a credit check to vendor payment in 20 minutes. By April, Microforum announced that CALMS had been selected by National Bank. In May, National Bank and Microforum entered into a joint venture called E-Fincom.com, aimed at providing on-line approval for credit, insurance and leasing applications. In September, Microforum entered into a licensing agreement with Financial Pacific Leasing for CALMS, followed in December by an agreement with Lease Acceptance Corp., a division of Federated Capital. The company has also been pursuing opportunities in new media, landing contracts to develop CD-ROM applications for Canon and Bombardier, among others.
Last year, Taurus Capital Markets analyst Adam Adamou told a Stockwatch reporter that Microforum wanted "to do everything that Amazon does but lease out the room to other companies." According to Mr. Adamou, the company's strategy was to create Web sites, do the marketing, offer warehouse facilities, provide call centres, and handle product shipping. "Take Amazon.com and take the name off of it," he said. Microforum now bills itself as a "total response" professional services firm offering electronic commerce, Internet strategy and database services.
Beyond the continuing general passion for high tech companies, especially those with an Internet aspect, Microforum's allure seems to have benefited from strong third quarter results released on Jan 12, a proposed financing announced on Jan. 13, and renewed speculation regarding an imminent Nasdaq listing.
On Jan. 12, Microforum reported revenues of $13,079,417 for the quarter ended Nov. 30, 1999, boosting its revenue for nine months to $33,677,860. The net loss through nine months came in at $249,432 -- chump change in a sector characterized as much by oceans of red ink as sky-high valuations. Specific details regarding the company's revenue streams are sparse; citing competitive reasons and confidentiality agreements, the financial terms of individual contracts are generally not made public. Revenue from sale of multimedia and Internet services is recognized as those services are performed and revenue from marketing, distribution, advertising and public relations is recognized on a completed contract basis. A significant portion of the company's revenue, 59 per cent as of Nov. 30, continues to be derived from three customers.
Early in 1999, Microforum president Howard Pearl projected revenues of $40-million for fiscal 2000 and the company seems to be on track to surpass that target. Mr. Pearl, however, will not speculate about whether that target will be exceeded. "You know, I'm a pretty conservative guy; I'm not prepared to go much beyond that at this point," Mr. Pearl says. "Granted, the run rate is a little better than that but we're going to hit the target and let's leave it at that."
On the heels of releasing its third quarter results, Microforum announced that it had entered into an engagement letter with a syndicate of underwriters led by TD Securities for a private placement of special warrants expected to raise a minimum of $40-million. The underwriting syndicate includes Nesbitt Burns, Taurus Capital Markets, Paradigm Capital, and Canaccord Capital.
The third quarter results and proposed $40-million financing have reinvigorated speculation that a Nasdaq listing is in the offing. Indeed, the speculation has reached a level not seen since April and May of last year when, flush from Microforum's warm reception at the Internet Electronic Commerce Conference in New York and agog at the market response to the debut of a comparable U.S. firm, Razorfish Inc., many investors were sure the time was ripe for Microforum to make the move to Nasdaq. (See Stockwatch: April 9, 29, 1999.) Razorfish began trading on Nasdaq on April 27, 1999, after an initial public offering at $16 (U.S.), closing at over $46 the following day. The same day, Microforum led the TSE's most active issues with more than 13.4 million shares changing hands, touching a 52-week high of $9.35 before closing at $8.
At the time, Mr. Pearl was also swept up in the enthusiasm, telling a Stockwatch reporter that Razorfish had followed much the same path as Microforum and that he could relate to the company. He was also looking forward to a Nasdaq listing. "We hope to have a Nasdaq listing by the end of the calendar year, possibly sooner," he said on April 28 last year. Speculation among investors that the Nasdaq listing would come well before the end of the year grew when Microforum announced on April 30 that it had entered into a bought deal financing for $20.15-million. At the annual meeting in August, however, Mr. Pearl dampened those expectations, telling shareholders that if the company was not listed on Nasdaq by the end of the year, it would be by early in the new year. Microforum's registration statement with the Securities and Exchange Commission, a prerequisite for a Nasdaq listing application, became effective on Nov. 8, 1999.
Now Mr. Pearl is more cautious about setting a time frame. "I'm very interested in getting to the Nasdaq, there's no question," he says. "I want access to those capital markets, I want access to the client base that would like to see us there...The reality is that we will get to the Nasdaq when it is the most optimum opportunity for this company." It typically takes between 60 and 90 days for a Nasdaq application to be processed and the company has yet to file an application. "I think we have surpassed the requirements for listing on the big board and we're sort of pushing forward with that," Mr. Pearl said without offering any indication of when the application would be submitted.
That may be something of a temporary disappointment to investors still watching Razorfish's stock price climb and longingly drawing comparisons with Microforum. On Oct. 19, 1999, Razorfish released its results for the nine months ended Sept. 30, 1999, reporting revenues of $19.1-million (U.S.) for the third quarter and $46.5-million for the nine months. Razorfish will be executing a two for one stock split effective Jan. 27. When Microforum briefly hit a 52-week of $14.05 on Jan. 20, Razorfish was setting its own 52-week high of $102 (U.S.). That is enough to bring out the green-eyed monster among Microforum shareholders.
Mr. Pearl is sensitive to the fact that shareholders are anxiously awaiting a Nasdaq listing but he is adamant that the company will continue to execute its business plan and only move when the time is right. "To just list and sit there doesn't do anything for us," he says. "In the past I think people have sometimes become a little impatient with us as we execute things. Now, historically, whenever we get to the execution -- maybe having taken a little bit longer to get there, being a little pragmatic -- it turns out to be a home-run for us. So we will get there and when we get there it will be a successful launch."
"What we really need is a story to go to the Nasdaq with and that's what we're really busy trying to orchestrate," Mr. Pearl says. A key element in that story, according to Mr. Pearl, will be a U.S. acquisition. Here, however, it is clear that more than a pragmatic approach has been holding things up. "We had hoped to complete one of our U.S. acquisitions a couple of months ago and the process has taken a little longer than we had anticipated, then the holidays got in the way, and so on and so on," says Mr. Pearl. "We'll complete an acquisition, establish the track record, and move forward with the listing with something we can point our finger to that has tangible evidence of U.S.-based business."
Mr. Pearl is currently telling Microforum's story to Canadian investors during a week-long road show with stops in Edmonton, Calgary, and Montreal before winding up with a number of meetings in the Toronto area on Jan. 24. "We're just trying to present ourselves to some of the institutional markets that may have been really not aware of what our strategies have been," Mr. Pearl says. During 1999, Microforum's strategy included the acquisition of Software Guaranty early in the year and the subsequent acquisition of Two Door Communications and Frameworks Communications, both completed in December. The Frameworks acquisition provided Microforum with a sales office in Chicago and in November the company opened a small production office in San Francisco. According to Mr. Pearl, the San Francisco office will increase to a staff of eleven by early February.
Mr. Pearl clearly has his sights on a larger presence in the U.S. It is also clear that Microforum's strategy involves establishing at least part of that larger presence prior to seeking a Nasdaq listing. Microforum currently has in excess of $14-million in cash and marketable securities, according to Mr. Pearl. "We're right in the middle of raising an additional $40-million that is specifically targeted at the development of our entree into the U.S.," Mr. Pearl says. Here Mr. Pearl's pragmatism is evident: "We've got to have an acquisition under our belts, to be able to point to a successful acquisition in the U.S., to point to an increasing and improving footprint in the U.S., and then we'll go back to the U.S. markets or go back to the Nasdaq for a funding in order to do the next acquisition. Let's be realistic, acquisition targets in the U.S. are far more expensive than they are in Canada; the multiples are higher, even for private acquisitions, and we need to go to the Nasdaq at a period of time when we want to use some funds to make an acquisition."
While many Microforum shareholders may be impatient for a Nasdaq listing, few would disagree that the multiples assigned to U.S. high tech companies are far higher than those assigned to comparable companies north of the border. Razorfish, with its market capitalization hovering around $4.5-billion (U.S.), may be a pertinent example; especially when compared with Microforum's market capitalization of approximately $440-million (Canadian). Of course that disparity is exactly what has Microforum investors anxiously awaiting the move to Nasdaq. Hoarse from speaking at more than 30 meetings over the past week, Mr. Pearl says, "We don't want to do or make the same mistakes that other Canadian companies have made when they went there -- you know, there was sizzle and then there was fizzle."
Nasdaq has certainly seen some effervescence but Microforum has enjoyed some sizzle of its own on the TSE over the past year. The stock traded as low as $1.10 in early January of 1999 and rarely made it above $1.50 during the first three months of last year before a dramatic rise to $12 in late April. At the time of that hefty increase, Canaccord analyst David Wong remarked that the company "got beaten up by some negative news" early in the year but still had some room to move before it approached the levels being reached by other Internet-related companies. In fact, much of that earlier beating in the press and through Internet chat sites was administered to Mr. Pearl, primarily with respect to a criminal record and prison term in 1982. (See Stockwatch: April 7, 1999.) In spite of the optimism of Mr. Wong and enthusiasm of Taurus analyst Mr. Adamou, the stock price subsequently tailed off, falling as low as $5.20 in October before climbing back up. Shareholders are hoping that this time the stock will be able to sustain and build on its recent gains. Microforum closed at $12.55 on Friday.
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