DAVID WONG INTERVIEW//COMPARES ENVOY WITH MCF
Who's Finding the Hottest Canadian Internet Stocks?
David Wong of Canaccord Capital, Recommends Envoy Communications
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Just how good is David Wong of Canaccord Capital? His recommendations have quickly found a home on the StockHouse® BullBoards™. StockHouse® members who post their messages about Mr. Wong's favorite stocks seem to rejoice almost every week as new records are established for those company's shares. In recent months, his favorites have become some of the most-written about companies in Canada: Microforum and Infowave. Mr. Wong is frequently quoted by the U.S. and Canadian press about developments in those companies.
StockHouse.com managed to snare the first exclusive full-length interview with David Wong. Instead of finding an aggressive, promotional analyst, we found Mr. Wong to be rather quiet, introspective and conservative in his views. This may be one of the better Canadian analysts to follow, now and in the future.
Most of the interview focused around Mr. Wong's recent recommendation, Envoy Communications Group [Toronto - ECG]. Some comparisons are made against Microforum [Toronto - MCF]. On May 4th, Mr. Wong called for a C$15.30/share price target within 12 months. Another analyst, Bob Leshchyshen of St. James Securities, had recommended a HOLD on April 28th and told StockHouse.com that he felt comfortable with his recommended price target of C$5.75/share. Following Mr. Wong's interview is a third analyst's view, Chris Evans of Dominick & Dominick. It is also a full-length feature interview.
StockHouse: How do you feel about evaluating Internet stocks?
David Wong: The market right now is really having a hard time understanding the Internet market. These sky-high valuations aren't measurable under normal, fundamental analysis. It boggles people how companies are getting these valuations. It's scary. At the same time, I'm not giving companies these kinds of valuations. I'm using traditional fundamental analysis. I'm looking at the company's structure. I'm looking at the management. I'm looking at what they're doing to build the business.
StockHouse: How does Envoy Communications Group fit into the analysis you use?
David Wong: Envoy Communications - if you look at what they're doing today - C$37 million last year - they have a nice little bottom line. There are very few companies who are in e-commerce or in the Internet who have a bottom line. The company made a couple of acquisitions. They're focusing their target on combining conventional marketing communications services with e-commerce or e-marketing. They don't create a unique platform, like some companies do. Microforum has the technology and expertise behind e-commerce platform design, bar none. But, there are going to be a lot of opportunities for people who utilize existing technology to make it better and useful. That's what Envoy's good at - using traditional marketing to target users to a web site, so sites end up with a higher hit ratio.
StockHouse: What kind of growth do you see this year?
David Wong: The third quarter for these companies is by far the strongest in the year. The company claims C$205 (million) projected in fiscal 1999. I'm being a little bit more conservative, taking a look at what last year's third quarter growth was compared to third quarter of the previous year, and I got C$178 million.
StockHouse: That's still almost a quintupling. Where are they going to get that?
David Wong: Well, acquisitions. The Watt Group is virtually done. That's going to bring in business. It's a synergistic fit to their core plan of building their business.
StockHouse: It's still pretty outrageous. Usually if you have that kind of growth, there are going to be stumbling blocks on the way. What happens if Amazon.com buys CD Now, and they lose the account? CD Now is their second biggest advertiser.
David Wong: That's right. So what Envoy's done is diversify across the board. Hampel/ Stefanides is focused on the U. S. - The Watt Group, and their Loblaws account, is well recognized for brand recognition. Envoy will bring you an all-in-one solution from marketing on the traditional side to creative web advertising.
StockHouse: Where's the biggest growth for them: the full-service agency or the e-marketing?
David Wong: E-marketing. But don't get me wrong. The traditional marketing services aren't slowing down.
StockHouse: If they're mainly a below-the-line advertising agency, and estimates suggest their gross margins are as high as 30%, how come their average gross operating profits, or gross margins, are comparable to their peers, who are full-service advertising agencies? That doesn't seem to make any sense. Does it have something to do with their acquisitions?
David Wong: That's part of it. You're paying for their goodwill. You're incurring a lot of cost-anytime you acquire a company. You're going to have to look at cutting it down. In the near term, you might have to eat a bit of expenses.
StockHouse: Another analyst worries that Envoy will make another acquisition too soon. Does that bother you as well?
David Wong: It depends on what type of acquisition. They just recently raised $18 million, and they want to grow the business. The best way to grow is to find someone who has an existing market place - a recognized brand name for something.
StockHouse: Do you think the company's overly promotional?
David Wong: They're a marketing communications company, but fundamentally they've got the numbers.
StockHouse: The strength of the company, as detailed by two other analysts, is in the credentials of the CFO.
David Wong: That's because he spoke to them about the financials - how he broke it down.
StockHouse: And now he is running the whole organization?
David Wong: Yeah, running a tight-knot ship. That's important. The numbers were pretty clean, nothing's hidden and nothing capitalized.
StockHouse: So do you think he's good?
David Wong: I'm not going to comment on that, but I'm comfortable with him.
StockHouse: What about the people surrounding the CEO and CFO? Are they all smart advertising people? Do they have what it takes?
David Wong: I've seen some of their work. Microsoft's with them. A&W is with them. Toshiba -America and Canada - are with them. They're doing something right.
StockHouse: How will the Toshiba deal impact Envoy?
David Wong: The U. S. numbers weren't given to me, but the Canadian numbers will bring in about $4 million. Toshiba's a brand-name account.
StockHouse: Did Toshiba come to Envoy because of their on-line advertising expertise?
David Wong: That's right - the creativity part. They have a platform with a proprietary design from Devlin Multimedia, another little animal where they acquired not just the e-commerce platform, but also the web design. They also have this software called Decision Room.
StockHouse: Decision Room makes them extra special. How do they promote it?
David Wong: I think they promote it as a value-added service to their clients. They say, "Look, instead of sending so-and-so from New York to L. A. every month, why don't we do this?" It's a cost-effective system.
StockHouse: You've written a report on Microforum, and you've written a report on Envoy. How does Envoy stack up against Microforum?
David Wong: Microforum started off, focused on marketing communications with an e-commerce platform. Their real strength is the technology - the platform design. They back-end stuff.
StockHouse: Do you see opportunities for Envoy and Microforum to work together?
David Wong: I'm not going to guess on that. Envoy's great at creative marketing for Internet advertising. They are the leaders in Canada. Microforum's moving into that, but they have a very powerful platform that's well recognized by Microsoft. In addition to that, they made an acquisition with SGI, Software Guaranty, which has one of the best software credit solutions - credit checking for financial institutions. National Bank wouldn't have signed them up without it.
StockHouse: You said Envoy is the leader of Internet advertising?
David Wong: Yes. They're one of the leading buyers of Internet advertising online in Canada.
StockHouse: Who could you accurately compare them to in the States?
David Wong: I've just started to look at U. S. comparables, so I wouldn't be able to comment. I'm just starting to look at Razorfish. I'm just starting to look at Doubleclick. Just recently there's another private company that's going to go IPO: iXL Enterprises.
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