March Networks Share Discussion Threads

[lordcoco] 06/7/2006 12:24

Relatively tiny volume here and in Canada, so hard to say where this is going in the absence of news. For any charty types out there the following might be interesting, change in direction?

[milesy] 27/6/2006 16:42

Agree Lord, all good stuff.

Presumably many of their contracts will have a maintenance/support component built into them, perhaps for the first year, as part of the initial project cost. In subsequent years however this will likely become chargeable and so serve as a reliable and growing revenue stream in its own right, typically at very good margins. Hopefully this will become clearer at results time as existing contracts mature and different revenue streams are identified.

[lordcoco] 27/6/2006 07:54

And yet another transport win for March. Whilst all the recent wins in this sector appear to be fairly small, they should imo be setting the stage nicely for one or two of the Big contracts out there discussed at results. I'm trying to find out how many similar contracts are awarded to competitors and how frequently, to get an idea of how big an accolade this is to be chosen once again by an RTA who, like the others, had contucted a "rigorous" trials process. I also think all the recent wins look likely to be followed by more orders from the same RTAs as they all look to be adding to or upgrading their fleets over the coming months and years.

Will be interesting to see reaction on TSX today, according to my flakey charting the share price had just hit the upperside of the downward channel and then retreated, will the news be enough to halt the move down?

[mitzis] 19/6/2006 10:10

Another transport win announced today keep them coming.

[elsworth] 13/6/2006 00:37

I now have revised my entry point to below £5...with a target range of £3-£3.50

Hope it helps

====================================================================
Federal government bailing out of troubled March stock

Bert Hill, The Ottawa Citizen
Published: Friday, June 09, 2006

The federal government is trying to sell a big stake in March Networks as its paper profits get burned in the technology market bonfire.

As the price of the once-hot stock slides -- down 44 per cent since March -- the value of the federal government's stake has fallen by more than $16 million.

Shares of March Networks tumbled 11 per cent yesterday after it forecast that profits will lag far behind expected strong sales growth in the new fiscal year that began in April.

March revealed during a conference call that the government plans to issue a tender next week seeking bids to take over the portfolio. March said that half of the government's stake can be sold now, but rest can't be sold until a later date.

In 2002, the government received warrants to buy 967,000 March shares in return for $5 million in research and development assistance under the Technology Partnerships Canada program.

An Industry Canada spokesperson could not be reached for comment yesterday.

With its stake equal to about five per cent of March Networks, the federal government is the second-largest stakeholder after Terry Matthews, who owns 28 per cent of the company he founded.

At yesterday's $22 closing price, the government's stake is worth about $21 million -- about four times its initial investment.

But that's a far cry from the peak of $38 million three months, or even the $25 million its was worth when it and other insiders were first able to sell their interests on April 26, one year after March went public.

March is forecasting sales of digital video surveillance recorders will reach $97 million to $107 million -- a gain of as much as 40 per cent -- in the new fiscal year that began in April.

But anticipated profits of $12.5 million to $14.5 million will be well below the $20.6 million reported last year.

March is pouring resources into a major sales force expansion and the acquisition of Trax Retail Solutions, a Texas theft-management software company that it bought this week for $7.5 million U.S.

Investors are also concerned that, while March reported a healthy 59-per-cent sales growth to $21.4 million for the April-ending quarter, revenues have been stuck in the $20-million range now for three straight quarters.

Chief executive Peter Strom was unapologetic, saying that while it might be "a flattish year," the results of "a year of investment" will be good for the company and investors.

March's results for the latest quarter were hurt by declines in the value of the U.S. dollar, which knocked sales down $4.5 million and profits about $2 million.

March revealed that Wal-Mart is the company's biggest single customer, generating 42 per cent of sales, or about $8 million, during the quarter. The retail giant had accounted for a majority of company sales in the past, raising fears about dependence on a single big customer.

March now generates more than half of sales from banks, public transit and non-retail commercial customers.

The company also revealed yesterday that it has closed a struggling e-health services division and is trying to find a buyer for it.

[lordcoco] 09/6/2006 12:37

RE the govt's stock:



I had previously thought that they were able to sell from the end of April, apparently not.

[lordcoco] 09/6/2006 10:59

sivandoj, I think it was building up support and infrastructure (yes new offices, staff etc.) in new and existing "overseas" territories.

Very little seemed to be asked or said about Europe apart from it accounting for about 1% of revenues.

I'm still trying to work out whether the contents of the call will be seen as positive with exciting times ahead or bearish in the short term due to the guidance issue. I'm on the bearish side at present, partly due to general market sentiment and the possible perceived "jam tomorrow" element thrown into the equation, not the best time for such stocks.

Will be interesting to see what the analysts present make of it all. Anyone heard anything yet? RBC downgraded yesterday before the call - though still a $35 target (from $40).

[sivadnoj] 09/6/2006 10:49

I don't know about you LordCoco, but I was left with a rather unclear idea as to what the investment was going to be in and what the money was going to be spent on. Are we talking about opening new offices and developing new geographies/markets? Or recruiting new staff to service existing clients/markets? Thanks for the link to the cc by the way.

[sivadnoj] 08/6/2006 14:49

Yes - 2007 as an investment year was the phrase that stuck in my mind. I thought the question as to how they were going to go about increasing opex raised an interesting point which didn't get fully answered. Also hadn't really appreciated the extent of the forex exposure. Walmart finally out in the open.

[lordcoco] 08/6/2006 14:39

A mixed bag. Unfortunately I don't think the prospect of the "investment year" leading to greater rewards in the future is going to wash short term.

edit getting hammered on TSX.

[umalukka] 08/6/2006 14:38

do you guys think price will recover as details of con call being absorbed? i really like this com & want to get back in thanks.

[lordcoco] 08/6/2006 12:32

Yes, 1.30.

[sivadnoj] 08/6/2006 12:21

Could anyone confirm the time of the call please - is it 1.30pm?

[lordcoco] 08/6/2006 11:02

Anyone feeling optimistic?

On the plus side - revenue forecast up (and I think in line with expectations), strong final quarter, recent acquisition should strengthen retail sector, dvr/vid ip biz solutions market still growing, very strong presence and growing market share, consistently under estimate own forecasts, recent wins showing increasing penetration into transport and public sector markets, large cash balance...

On the down side - eps forecasts appear to fall somewhat short of expectations giving rise to worries about growth (though I would have thought revenues forc would allay some of this) and then valuation multiple, bearish market possibly wont accept anything other than very positive forecast, worries about acquisition and growing payroll, NDAs possibly hiding real level of contract wins, other issues to do with WalMart, competition, margin errosion etc. will rear their heads again...

Will the pros outweigh the cons? Conf call is going to be interesting.

I sold a few k this morning in the hope of a trade, I still firmly believe in the long term prospects of March, but given that there may well be a negative reaction to the forecasts and a few punters joining that large short position on the TSX... well we'll have to wait and see.

edit - you and me both jon.

[sivadnoj] 08/6/2006 10:59

LordCoco - I agree with your comments. I've sold this morning which is a disappointing outcome having held at above £20. I like this company and admire the management team. Like you, I think this will come good longer term.

If there is a big sell off, then there may be an opportunity for a similar play to this time last year, based on the conservatism of management's forecasts. As you point out, however, market sentiment appears rather different this time.

Watching with interest...

[lordcoco] 08/6/2006 09:21

. duplicate

[lordcoco] 08/6/2006 09:21

No one got any views on results and guidance?

It is going to be very interesting to hear on the call why guidance is so low especially in the light of what looks like another very good quarter, practically flat (even taking into account the tax reporting issue), making RBC's prediction look optimistic in the extreme (I bet the analyst there is mightly p"ssed off).

To be honest I'm suprised the share price hasn't fallen further, though I'm expecting a bit of a drubbing later on TSX, that is if the management don't make some extrtemely encouraging noises at the call.

I still believe the co. will come good but given their own outlook (regardless if it is down to expansion or whatever) and the current general market background - short/mid term is not looking good imo. Hope I'm wrong,

[lordcoco] 07/6/2006 22:56

Results:



Q4 looks to be ahead of estimates, though outlook falling short of expectaions.

March have consisitently been conservative in their outlook, but I reckon they are going to have to come up with a very upbeat call to sustain the current share price :(


Revenue for the fiscal year ended April 30, 2007 is expected to be in the range of $97 million to $107 million.

Net earnings for the fiscal year ended April 30, 2007 is expected to be in the range of $12.5 million to $14.5 million for a diluted earnings per share in the range $0.70 to $0.81. The Company's annual guidance for fiscal 2007 includes the impact of a pending acquisition that was announced on June 6, 2006 except for the amortization of the acquired assets which will be dependent upon finalizing the allocation of the purchase price to specific assets on closing of the transaction. Net earnings expectations for fiscal 2007 reflect future income tax expense of approximately 36% on Canadian taxable income.

[lordcoco] 06/6/2006 16:56

RBC note from today fwiw:

Event MN is due to report FQ4/06 after the close on Wednesday, June 7th. The conference call is at 8:30am EDT on June 8th (dial-in: 1-800-814-4941). Investment Opinion • Expect Solid Results: We forecast sales of $21.6 million generating EPS of $0.27 – this is roughly in-line with consensus of $21.1 million and $0.27. We believe this result is achievable (with top line arguably conservative), as it reflects a recovery to $9.0 million (from $7.5 million from the large retail customer after the holiday season, with the balance of the business roughly flat sequentially. March has historically delivered better solid sequential growth. • F2007 Guidance Will Be Key: We expect March to again offer full year guidance, and history indicates that we can expect relatively conservative assumptions behind this guidance (i.e., existing or highly visible contracts). Still, we expect March to offer guidance reflecting revenue growth on the order of 30%. This is consistent with ongoing strength in the Digital Video Surveillance market, and recent management comments that March continues to grow faster than the market. • Shares Recovering...: At their peak just before FQ3 results (late February, 2006), MN shares traded as high as $42. After that, they plummeted roughly 45%, with no identifiable changes in the fundamentals or outlook for the company – please refer to our note of May 10th for a discussion of "potential and partial explanations" for the decline, but nowhere can we find a lost contract, product issue, imminent new competitive threats, financial shortfall, etc. Since then, MN shares have recovered somewhat (approx 15%), and a modest premium to peer valuations has returned. • ...And Still Offer Attractive Value: At current levels, MN trades at 24.8x our C2007E GAAP EPS estimate, roughly 5 P/E points above peer companies. In our view the premium is justified, given that MN has much a much higher expected growth rate, and that MN will pay no taxes for several years, though they are applied at a 36% rate in the GAAP EPS calculation. On an untaxed basis, MN now trades at 15.8x C2007E Adj. EPS of $1.63. We note that this is now below the IPO valuation level (which at the time was roughly 16x forward year untaxed EPS).• Valuation: Our target remains $40.00, reflecting roughly 25x C2007E cash EPS of $1.63. This multiple is in line with our expected growth rate for MN over the next 3-5 years. Viewed another way, the target reflects roughly 30x C2007E GAAP EPS, plus cash (including the effect of the tax shield). We rate MN Outperform, AAR with a $40.00 target.
RBC Capital Markets March Networks
FQ4/06 Preview March Networks is scheduled to report FQ4/06 results on Wednesday, June 7th after the close. We expect another solid quarter from March, and our estimates are as follows. Exhibit 1: FQ4/06 Estimates (FY ended April) March NetworksRBC Est.Cons.(in C$MM)Q4/06EQ4/06EQ3/06A% q/qQ4/05A% y/yF2006EF2005A%y/yRevenue21.6 21.1 20.0 8.0%13.5 60.0%76.3 42.7 79.0%Gross Profit12.3 11.8 4.8%7.3 68.8%43.6 22.2 96.0% %57.0%58.7%54.0%57.1%52.1%Opex8.0 7.0 14.9%4.6 72.8%26.8 16.0 68.0%Operating Profit4.3 4.8 -9.8%2.7 61.8%16.7 6.2 167.8% EBITDA4.2 4.8 -12.4%2.7 53.8%17.1 6.3 169.8%Net Income4.8 5.2 -8.1%2.5 86.5%17.9 6.0 196.8%EPS (f.d.)0.27 0.27 0.30 -8.4%0.20 39.5%1.04 0.52 100.9% Source: Company reports; Thomson First Call estimates; RBC Capital Markets estimates March Networks will host a conference call at 8:30am EDT on Thursday, June 8th. The conference call can be accessed at 1-800-814-4941. The replay will be available at 1-877-289-8525 with passcode 21133197. Key Items To Watch For In The Quarter Expect A Rebound In Revenue From Lead Customer: Last quarter (FQ3), revenue from the large retail customer declined to approximately $7.5 million, or about 36% of total sales. This was down from approximately $9.5 million in the previous quarter, and just over $9.0 million in the quarter before that. The decline was logical, in our view, given the customer's reluctance to deploy new solutions during the busy holiday months. This quarter, we expect revenue from this customer to rebound to $9.0 million – near, but not matching, record levels. Excluding That Customer, Our Revenue Growth Forecast Is Likely Conservative (Relatively Flat): We expect our forecast to be met (and arguably is conservative), given that it currently reflects business from all other customers being flat qtr/qtr. March has historically delivered much better than this – last quarter, for example, all other customers made up the $2 million decline from the lead customer (almost a 20% sequential increase). Gross Margins – Expect Continued Strength: Over the past several quarters Gross Margins have surprised us on the upside, peaking at 58.7% last quarter. We expect this to trend down over the next couple of years to the mid-50s, and our current forecast reflects 57% for FQ4/06. Outlook for Increased OpEx (Particularly in Sales & Marketing Costs): March was hiring aggressively early in the year, and we expect that pattern continued (accelerated?) in FQ4 and beyond. Total headcount grew to 156 at the end of FQ3, with an additional 15 expected to be added in FQ4. Looking out to next year, we expect a sharp increase in the number of salespeople (from ~15 to ~35-40), and will look for commentary on the conference call regarding the pace of this expansion. Record FQ4 One-time Gain From Tax Asset: A controversial item highlighted on last quarter's call, we expect March to take a one-time gain in FQ4/06 related to unused tax losses and R&D tax credits. These total over $70 million. Because March is now profitable and is expected to remain so (somewhat ironic that this was a contributing factor to the stock decline over the past 3 months...), March must record this as an asset on the balance sheet, and book a significant one-time on the Income Statement. Looking forward, March will record Income Tax expenses at an expected rate of 36%, though we expect no significant cash taxes will be paid for several years. This is reflected in our current GAAP forecast. Currency Impact: March reports in C$, though most of its revenue (and many of these expenses) are denominated in US$. March's growth over the past year has far outstripped the currency headwinds, but the continuing strength of the C$ remains a factor. F2007 Guidance Will Be A Key Element In The Release & Conference Call: We expect March to again offer full year guidance, and history indicates that we can expect relatively conservative assumptions behind this guidance. March typically offers revenue guidance encompassing only known customers and named prospects expected to close – i.e., little/no allocation is made to reflect new opportunities that arise through the year, or incremental contribution from the salespeople expected to be hired. June 6, 2006 2
RBC Capital Markets March Networks
Still, we expect March to offer guidance reflecting revenue growth on the order of 30%. This is consistent with ongoing strength in the Digital Video Surveillance market, and recent management comments that March continues to grow faster than the market. Valuation and Recommendation At their peak just before FQ3 results (late February, 2006), MN shares traded as high as $42. After that, they plummeted over 40%, with no identifiable changes in the fundamentals or outlook for the company – please refer to our note of May 10th for a discussion of "potential and partial explanations" for the decline, but nowhere can we find a lost contract, product issue, imminent new competitive threats, financial shortfall, etc. Since then, the shares have recovered somewhat (approximately 15%), and a modest premium to peer valuations has returned. Current Valuation Parameters At current levels, MN trades at 24.8x our C2007E GAAP EPS estimate, 5 P/E points above peer companies. In our view this premium is justified, and we note several points: ?? MN has a much higher growth rate than peers – almost 2x earnings growth and 3x revenue growth (see table below). ?? Though there is a limited trading history, this is typical of the premium at which MN has traded. ?? MN will pay no taxes for several years, though they are applied at a 36% rate in the GAAP EPS calculation – a higher rate than peers (see discussion and exhibit 4 below). ?? On an untaxed basis, MN now trades at roughly 15.8x our C2007E Cash EPS of $1.63. We note that this is now below the IPO valuation level (which at the time was roughly 16x forward year untaxed EPS). ?? Netting out cash (mostly built through the IPO) and the cash benefit of the tax shields (which seems fair if we are to look at taxed EPS), then MN trades at approximately 16x 2007E GAAP EPS. Exhibit 2: Recent Share Performance -45%-40%-35%-30%-25%-20%-15%-10%-5%0%5%10%28-Feb-067-Mar-0614-Mar-0621-Mar-0628-Mar-064-Apr-0611-Apr-0618-Apr-0625-Apr-062-May-069-May-0616-May-0623-May-0630-May-066-Jun-06Return (since Feb 28, 2006)MNNICEVRNT Source: Bloomberg Exhibit 3: Valuation Parameters Mkt Cap04-07 EPS04-07 RevNameTickerPriceshrs(mm)(US$mm)CAGRC2004C2005C2006EC2007ECAGRC2004C2005C2006EC2007EMarch NetworksMN$26.2917.4 $456.851%85.9x 27.4x 18.3x 24.8x 55%11.2x 5.5x 3.2x 3.0x Verint SystemsVRNT$31.9733.1 $1,058.227%39.0x 31.0x 23.7x 19.0x 21%3.2x 2.6x 2.1x 1.8x NICE SystemsNICE$27.1551.4 $1,395.532%47.6x 32.3x 25.9x 20.6x 25%4.0x 3.2x 2.5x 2.1x Average (excl. March)43.3x 31.7x 24.8x 19.8x 3.6x 2.9x 2.3x 1.9x P/EEV/S Source: Company reports; RBC Capital Markets estimates
June 6, 2006 3
RBC Capital Markets March Networks
Given a 50%+ EPS growth rate for MN over 2004-2007 (74% pre-tax growth), we view current multiples as very compelling. On a sustainable basis over the next 3-4 years, we anticipate EPS growth on the order of 30%+. Taxes skew the valuation and peer comparison: March's tax situation complicates the measurements somewhat, and unfairly depicts EPS trends as we move from F2006 to F2007. As discussed at the end of Q3/06, March will begin accounting for Income Tax at a 36% tax rate beginning in Q1/07, though previous losses, etc. will shield the company from paying cash taxes for several years. On a cash basis, we expect MN to generate EPS of approx. $1.63 in C2007, implying a P/E multiple of 15.8x on Cash EPS. Further complicating the comparison, NICE and Verint have expected tax rates of 19.5% and 25% respectively for F2007, well below MN's accounting levels. For the sake of comparison, the following table outlines P/E multiples on pre-tax earnings. Exhibit 4: Pre-Tax Multiples Mkt CapNameTickerPriceshrs(mm)(US$mm)C2005C2006EC2007EC2005C2006EC2007EC2005C2006EC2007EMarch NetworksMN$26.2917.4 $456.8$15.7$21.9$28.923.9x 17.0x 12.9x 29.1x 20.8x 15.8x Verint SystemsVRNT$31.9733.1 $1,058.2$42.3$58.5$78.218.8x 13.6x 10.1x 25.0x 18.1x 13.5x NICE SystemsNICE$27.1551.4 $1,395.5$39.9$63.3$81.825.3x 16.0x 12.4x 35.0x 22.0x 17.1x Average (excl. March)22.0x 14.8x 11.2x 30.0x 20.1x 15.3x Price / Pre-tax IncomeEV / Pre-tax IncomePre-tax Income Note: This table assumes constant share counts for all companies, unlike our calculation above (15.8x for MN), which assumes growth in share count through C2007. Source: Company reports; RBC Capital Markets estimates We continue to believe that MN offers a compelling risk/reward proposition, and maintain our Outperform, Above Average Risk recommendation and $40.00 target price. We remain firm believers in the market opportunity facing March over the next several years, and in their product strategy and execution ability to capitalize on that. Our price target of $40.00 reflects roughly 25x C2007E Cash EPS of $1.63. This multiple is in line with our expected growth rate for MN over the next 3-5 years. Viewed another way, our price target reflects roughly 30x C2007E GAAP EPS, plus Cash (including the effect of the tax shield). Price Target Impediments Our financial forecasts are predicated on the continued deployment of March's solutions at existing customers, and continued wins with new customers to replenish the backlog. Severe pricing pressure, or major technological advances by competitors would threaten these assumptions and therefore impede achievement of our price target. Company Description March Networks is a leading provider of IP-based digital video surveillance solutions to the banking, retail and transportation sectors. March introduced its networked Digital Video Recorder (DVR) product in 2002, and since then has grown its installed base to over 24,000 DVRs worldwide. The company has an impressive list of clientele including U.S. Bancorp, Wachovia Corp., DHL International, Cadillac Fairview, Singapore Mass Rapid Transit, and the Royal Bank of Canada. Required Disclosures Explanation of RBC Capital Markets Rating System An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector. Ratings Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present):

[sivadnoj] 06/6/2006 15:40

Too expensive? Reference to the acquisition being slightly earnings dilutive in 2007?

[lordcoco] 06/6/2006 15:40

Perhaps the sentence:

"...will be slightly dilutive to net earnings"

has spooked a few, hugely short sighted imo if so.

Or general market sentiment.

Or traders not wanting to hold over results.

Or mms making the most of situation. (small volume)

Or the company is doomed and we shall find out why tomorrow night =:0

Btw, RBC issued a note today reiterating their $40 target, so the "doomed" scenario is unlikely. They always seem to talk the most sense to me, then I suppose they would. ;0)

[umalukka] 06/6/2006 15:33

big drop despite the aquisition.does anyone know what is happenig?