Tech haves and have nots

Which way is the economy taking us? The U.S. is likely in a recession, yet the Canadian economy added jobs in January and February. Some publicly-traded Canadian tech names are being slaughtered as a result of missed estimates, while others are doing just fine as the currency has stablized around parity with the American greenback.

The Haves:

Arise (APV:TSX) – appear to be on track biz wise (even if pre-revenue) but still down 30% this year along with the drop in the NASDAQ.

Bridgewater (BWC:TSX) – record revenue for 2007; stock is still down 50% from December IPO.

Descartes Systems (DSG:TSX) – stock is down 10%, but Paradigm’s research analyst says buy after the quarterly results came out last week:

“Reports in-line Q4/FY08 results including revenues and adjusted EPS of $16m and $0.07. We view the results as being relatively positive in light of a difficult macro environment. Recent acquisitions, along with the continued automation of the logistics industry should help to support growth in FY09 and beyond. Reiterate Buy rating and $5.25 target.”

DragonWave (DWI:TSX) – down half from the October IPO, despite annoucing good results on January 10th for the third quarter ended November/07, according to the company: “Revenue for the third quarter was $11.5 million, compared with $4.8 million for the same period of the last fiscal year, an increase of 139%. Sequential growth from the second quarter of fiscal year 2008 was 17%. These results reflect another record for quarterly revenues.”

Macdonald Dettwiler (MDA:TSX) – this cash flow beast is shedding the space products business and charging headlong into the electronic information and data-gathering age. Shares are up 10% this year on the sale of the famed Canadarm to foreigners.

MKS (MKX:TSX) – just announced largest deal in firm’s ~20 year history; stock flat this year. 7% dividend yield, almost double that of Royal Bank. Versant Partners raised its target to $2.15 and upgraded the stock:

“MKS announced that it has signed a $5 million enterprise-wide license agreement with an existing customer in the automotive industry. BOTTOM LINE: Upgrading to BUY (from HOLD) and increasing target to $2.15 (from $1.50). This very positive announcement comes in the same quarter in which the company has already closed two other large deals–and we are not even half way through it. We have been looking for this break out and would be aggressive buyers of the stock at current levels.”

Open Text (OTC:TSX) – making Hummingbird work, keeping the steering wheel out of Tom’s hands, and the stock is hanging in there this year.

The Have Nots:

Espial (ESP:TSX) – went out too early, with too small a float; the sector is exciting (IPTV) but meaningful revenue isn’t around the corner. Shares are down 20% this year, and more than half since the 2007 IPO.

Evertz (ET:TSX) – Stepped on a banana peel yesterday and the stock dropped 34%. Here is David Hodgson’s take on it from Genuity Capital Markets:

“The key North American market revenue growth fell from an average of 62% in the prior four quarters to 18%. Given our revenue forecast for Q4/F08, we believe YoY total revenue growth will be 2%. Given that management talked of a slowing U.S. market, this would imply negative YoY growth in North America in Q4/F08. Gross margin fell by 20 basis points to 58.6% due to “a weakening of the U.S. dollar as well as continued competitive pricing in the marketplace.” Most worrisome is the first month and backlog statistics in Q4/F08. Shipments of $16 million in February is a material decline from the $21 million shipped in November, and with a backlog of $22 million exiting February, we are forecasting revenue of $60 million in Q4/F08. We believe this speaks to competitive pressures from the likes of Harris (which has been pricing aggressively) and some signs of a macroeconomic slowdown.”

Nortel (NT:TSX) – situation isn’t getting any easier. Stock is down 50% this year, and the Motorola spinout / merger idea was panned. Is another stock consolidation coming? Brokerage firms still won’t let you margin the name, despite being over $3/share, which speaks volumes about their confidence in the story.

Redline (RDL:TSX) – stock is down more than 75% (see prior post “Redline Communications a classic tale“, March 3-08)

Sandvine (SVC:TSX) – the Entrepreneur of the Year has his hands full now, as the stock has marched down from $7.30 to $1.45 (see prior post “Sandvine gets taken out and shot” March 7-08). Here’s the word from Canaccord’s Morning Coffee note of yesterday:

“My youngest daughter phoned me yesterday to tell me she made a gigantic poo. I told her that Sandvine did, too.” – Proud Morning Coffee father. This provider of networking equipment provided lowered its 2008 guidance and outlook. On December 20, 2007, the company announced that it was expecting revenues for fiscal 2008 to be in the range of $100-110 million, and yesterday the company announced that it was lowering its total revenue guidance down to a range of $80-85 million. As well, for the quarter ended on February 29, the company estimates that revenues will be $8.2 million, while consensus revenue forecast was $19.6 million for the quarter. The company stated that its first quarter opportunities still exist, but that customers are taking longer to make decisions. The company does not appear to believe that it lost any contracts, but just that buying decisions had been delayed, which is due in part to overall economic uncertainty. Look for this to be a reason/excuse for all sorts of companies in the coming months.”

You’ll be hard pressed to find a theme in any of these snapshots. And that’s what makes it so bedevilling. It’s not that all tech names are cursed right now, but you’ll be challenged to figure out which ones are going to flourish over the next few quarters, and which ones are going to stumble. I could guess that Bridgewater and DragonWave will bounce back faster than Nortel, Redline or Sandvine, what it’d only be a guess. For the shareholders of names that haven’t yet hit the wall of mismanaged expectations, one has to wonder if our turn is next.

MRM
(disclosure – I own MKX)