June 26, 2006, 11:08 am

Week of 6/26

9 on tap this week. Will have full analysis of all on site:


this week's free blog piece is a small communications infrastructure offering of a few week's back SNCR. I do own shares of SNCR currently.

SNCR - Synchronoss

SNCR - Synchronoss Technologies plans on offering 8.75 million shares assuming over-allotment is exercised. The price range is $9- $11 and 1.25 million shares are being offered by insiders. Goldman Sachs and Deutsche Bank are lead managing the offering. Post- offering SNCR will have 25.3 million shares outstanding for a market cap at $10 of $253 million. IPO proceeds will be used for working capital and general corporate purposes.

From the prospectus:

“We are a leading provider of e-commerce transaction management solutions to the communications services marketplace based on our penetration into key providers of communications services.”

I always reprint the lead sentence in the prospectus as usually it is a succinct overview of the business. This one doesn't really clear anything up though! SNCR is essentially a back- office communications software company. Their customers are the large communications providers and SNCR's platforms allow communications service providers to take, manage and provision orders and other customer-oriented transactions. SNCR is an e-commerce software company servicing the communications industry, specifically wireless and VoIP.

Growth focus is wireless and VoIP communications companies. Current customers include most of the large communications providers: Cingular Wireless, Vonage Holdings, Cablevision Systems, Level 3 Communications, Verizon Business, Clearwire, 360 networks, Time Warner Cable, Comcast and AT&T. Note that while the customer base is wide, Cingular accounts for the bulk of SNCR's revenues. Cingular has accounted for approximately 75% of SNCR's revenue the previous 15 months.

Cingular, Vonage, and Cablevision accounted for roughly 95% of revenues the past 15 months.

Thus far the bulk of SNCR's business has been selling the software platforms that allow Cingular wireless to quickly automate new customer internet orders into new customer activations. SNCR generates revenues from fees on each transaction that utilizes their software platforms.

SNCR is attempting to expand their services to include automated transaction processing through increasing on-demand avenues including bundled services, VoIP etc.... Over the past few years, communications providers have shifted customer interaction more and more to internet 'on-demand'. More and more customers are shopping for services, shifting services and signing up for services without speaking to an actual customer service person. SNCR is attempting to set themselves up for this shift by becoming the standard new customer activation back office software platform. Instead of a customer service person taking and activating new customers, SNCR's software automates the process.

SNCR's revenue driver product line is called 'ActivationNow'. As with most software platforms of this kind it is scalable allowing quick efficient automatic handling of a large volume of data. SNCR's selling point with ActivationNow appear to be its 'exception handling' component. It has the ability to handle automated transaction with incomplete data, “Our solution identifies, corrects and processes non-automated transactions and exceptions in real-time. Importantly, as exception handling matures within a service, an increasing number of transactions can become automated, which can result in increased operating leverage for our business.”

A few features ActivationNow automates for communications providers are: 1)New account setup and activations-- including credit checks, address validation and equipment availability, 2) Feature requests-- adding new functionality to existing services, 3) Contract renewals-- for consumers and enterprises, 4) Number port requests-- local number portability, 5) Customer migration-- between technologies and networks, 6)Equipment orders-- wireless handsets, accessories etc....

Currently SNCR's main competition is the internally developed systems at various communications providers. Thus far SNCR has been able to penetrate substantially only Cingular and Vonage. While most communications providers have utilized SNCR's software in small measure, they've continued to rely on their own internally developed systems and software to automate new customer on-demand orders. Whether SNCR becomes a successful public company depends on their ability to 'sell-in' their product as a full replacement over internally developed systems. While they've been able to gain a foothold with many providers, thus far SNCR has not been able to accomplish this outside of Cingular and more recently Vonage.

SNCR currently processes hundreds of thousands of wireless transactions every month and has grown their VoIP transaction base monthly for the past year. SNCR sees VoIP as being a future revenue driver, specifically automating Vonage transactions.

Contracts are typically 12 to 48 months in length. SNCR's systems integrate with the communications provider's own networks. This means that when SNCR is able to sell in to a new provider, there is a very good chance of a long lasting relationship.


$3 a share in cash post-offering, no debt.

3 X's book value at $10 a share.

Essentially in start-up revenue stage 4 years ago, SNCR has seen their revenues grow strongly the past 2 years. From $16.5 million in revenues in 2004 SNCR grew 65% in 2004 to $27.1 million. SNCR doubled revenues in 2005 to $54 million. Pretty impressive.

Gross margins have been 44% past 15 months. For a software company not the strongest gross margins, but also not surprising here as SNCR's main competition is the communications providers own systems. 2005 was the first year of profitability for SNCR with net margins of 10%. Earnings per share in '05 were 23 cents. At $10 a share, SNCR will be trading 43 X's trailing earnings. Revenues look to grow strongly again in 2006. SNCR has had 12 straight quarters of sequential revenue growth, growth that should continue in 2006. I always like to see this sort of continued quarter to quarter revenue growth. The 3/06 quarter was the strongest in SNCR's operating history.

I think SNCR can grow revenues another 33% in 2006 to approximately $72 million. Net margins should improve slightly to the 11% range. Net income estimates for 2006 are $0.30- $0.33 cents. At a $10 pricing, SNCR would be trading at 32 X's 2006 estimates.

The trends are solid here. Communications providers are seeing a higher % of new customers generated from internet orders. SNCR is positioned well to capitalize on this trend as evidenced by the strong revenue growth. The question here is not whether automation cuts down on expenses. It does. The big question for SNCR is whether they will be able to shift communications providers to SNCR's ActivationNow and away from the communications providers own internally developed automated systems. If SNCR is able to generate substantial revenues from just one new communications provider the valuation in range is quite attractive.

The big risk here is losing Cingular. If SNCR loses that account, they're overpriced in range substantially so. I doubt that will occur as SNCR has had a relationship with Cingular since 2001 and the current contract with Cingular runs through January 2008. Whenever an IPO relies so substantially on one company for the bulk of their revenue, losing said company is always the biggest risk going forward.

I like this offering in range. No, I don't believe they're cheap in range, but I like the strong revenue growth and the fact SNCR has been able to effectively develop automated software platforms for internet wireless and VoIP transactions. SNCR has 13 straight quarters of revenue growth and has shown an ability to gain a foothold into major wireless and VoIP providers. Really all if will take is another deal similar to the current deals with Cingular/ Vonage. If SNCR is able to more fully penetrate just one more communications service provider, I think SNCR could easily be a $15+ stock. I like the risk/ reward of that occurring sometime over the next year.

June 18, 2006, 5:37 pm

top 10 of '06...thus far

We've seen approximately 80 ipos here in 2006 so far. Combined the group has returned an average of 1%, hardly impressive. There have been winners though. Let's take a quick look at the top 10% gainers from ipo pricing here in 2006 and see if we can find any trends.

1 - Chipotle(CMG) - 181%. This market has been so difficult that even the most successful offering of 2006 recently had a busted secondary. I was quite high on CMG pre-ipo, the valuation in the $60's though is awfully aggressive. 55 X's '07 estimates with 20% expected revenue growth.

2 - Fortunet(FNET) - 86%. As is often the case each year, a few of the top 10 best performers actually price their ipos under pricing range. One of the best kept 'secrets' when it comes to ipos is that the best time to buy them is often when no one wants them. FNET is banking on their mobile gambling device in Las Vegas and the aggressive estimates are assuming solid revenues from the device beginning late '06.

3 - Calumet Specialty Products(CLMT) - 54%. One that priced well within range and opened flat. Again most assume that to make money in ipos one must chase the 'hot' money, we'll see though that most in the top 10 priced in or below range and were available in the aftermarket within $1 from pricing. CLMT is a structured MLP refiner paying a hefty yield. These high yield energy MLP's have been among the best performers overall this decade. We've recently seen a number of lower yielding MLP's struggle, but those that pay 45 cents+ quarterly yield continue to perform well overall. These type ipos have been the best spot to be in the 2000's, something you really won't read anywhere but here.

4 - H&E Equipment Services(HEES) - 52%. HEES ipo'd right in the middle of a bull run for it's group. It has pulled back recently, still up strong from pricing.

5 - Liquidity Services(LQDT) - 48%. A little internet company pricing mid-range and opening at pricing.

6 - Pacific Airport Group(PAC) - 44%

7 - LoopNet(LOOP) - 35%. The most recent on the list, another small internet company.

8 - American Railcar Industries(ARII) - 32%. The 1'st railcar ipo after '05's 'ipo of the year' RAIL.

9 - Nextest Systems(NEXT) - 28%. Small tech company, priced low end of range.

10 - Koppers Holding(KOP) - 27%. Another that priced at low end of range, KOP is the only one in the top 10 with significant debt levels.

Some common themes in '06 from this list:

1) Other then PAC, the other 9 on the list all had offerings of under 11 million shares. The larger offerings are just not working in 2006, not thus far at least.

2) Other then KOP, the highly leveraged ipos are nowhere to be seen. Debt mutes stock performance period, especially when that debt is laid on to enrich a leveraged buy-out operation. One can save themselves a lot of money over time if they simply skip the highly leveraged ipos across the board.

6) 6 on the list priced mid-range or below and 5 of those were available within $1 of pricing. 2006 has not been a year to chase price, not at all.

Large offerings that have opened with enthusiasm are completely absent from the list other then PAC. PAC listed in the US/Mexico, so it has been the exception in another way as well.

I would expect similar the rest of 2006. Unless one can gain hefty allocations of desired offerings, I suspect the way to make money in the ipo market the 2nd 1/2 of 2006 will be to find the interesting sub 11 million share offerings with little to no debt that price mid-range or below.

Those buying offerings way up on open this year have gotten hit hard: CROX/THI/VSE as well as brand names ZZ/MRT all priced strong, opened well up and fell quickly/hard. Not to mention other bulky offerings like VG/HIMX both 30+ million share offerings that don't seem to have a bottom.

LQDT/CLMT/FNET/NEXT/KOP/LOOP all priced mid-range or below and all but LOOP opened right near pricing. All 6 though are in the top 10 performance though while the larger offerings with more fanfare have thus far failed.

2006 has so far been the year to skip hype/attention and focus on small and quiet. I see that continuing, very much so.

June 17, 2006, 6:20 pm

Week of 6/19

3 on the docket this week. All 6 scheduled for last week actually priced/opened. Fairly lackluster initial performance from the group, I really like one of them at current levels. This week's free piece is one of those that priced last week, not one I like all that much however.

GOLF - Golfsmith International

GOLF - Golfsmith International plans on offering 6 million shares at a range of $14-$16. Merrill Lynch and JP Morgan are lead underwriting the deal. Post-offering GOLF will have approximately 16 million shares outstanding for a market cap of $240 million at $15. Ipo proceeds are being used to pay down debt. Atlantic Equity Partners will own 58% of GOLF post-ipo. AEP purchased GOLF in 2002 from the company founders.

From the prospectus:

'Golfsmith is the nation’s largest specialty retailer of golf equipment, apparel and accessories based on sales.'

Founded in 1967 GOLF operates 55 stores, and also sells through catalogs and the website www.golfsmith.com. GOLF has opened 3 stores in the 2nd quarter of '06. Much like the large sporting goods stores, GOLF's 15,000-20,000 square foot stores attempt to provide an activity based experience in their stores which includes indoor hitting areas and on-site golf instruction. GOLF also sells tennis equipment in the majority of their stores and owns 6 Don Sherwood Golf & Tennis stores.

Golf clubs account for 45-50% of annual revenues. 70% of revenues are derived from retail stores, the bulk of the remainder from online and catalog sales. Note that GOLF is seeing a stronger decrease in their catalog sales then they're seeing growth in their online sales.

The sport of golfing grew immensely in popularity from 1970 through 2000. This decade however, the number of rounds of golf played in the US annually has plateaud and remains stagnant. What has grown though are the number of merchants selling golf equipment and attire.

This GOLF ipo is pretty much a carbon copy of the GGXY ipo. GGXY priced at $14 a share and is currently trading around $17 a share. Much like the GGXY offering, GOLF is a pretty straightforward simple ipo --- They sell golf equipment and apparel through retail stores and the future strategy is to open more stores and gain a larger share of the golf market. Competition is tough in this space. Along with other specialty golf shops GOLF must compete with the large sporting goods chains such as Dicks/Big Five/Modell's as well as broad based retailers Wal-Mart/Target and online sellers Amazon & Ebay. Oh yes on-course pro-shops are another competitor of retailers such as GOLF/GGXY. The specialty golf retailers attempt to differentiate themselves by offering expertise that the non-specialty locations cannot provide. This is where the on-site golf instruction and indoor hitting areas come into play. Still though it is a very competitive space and GOLF is selling exactly the same branded equipment and apparel as all the others. Exactly the same stuff as less then 15% of all sales are from GOLF's own proprietary line of products. Largest proprietary brand is Lynx.

GOLF leases all of their store locations, they do not own the property underneath their stores. Currently stores are scattered across the major population centers of the US, including 7 in the NYC and SF area and 6 in Los Angeles.

As noted above Atlantic Equity Partners purchased GOLF in 2002 and since taking control has made expansion a priority. In the past 4 years, GOLF's store base has grown from 26 to the current 55. GOLF plans to continue their aggressive expansion after coming public. Plans are in place to open between seven and nine additional new stores in 2006 and between 14 and 16 new stores in 2007.


Negligible cash on hand post-offering, $22 million in debt.

4 1/2 X's book value at $15.

Sales per square foot have grown approximately 10% each of the past 2 years. Same store sales growth has been rather sluggish at 0/7% for 2004 and 2.6% for 2005.

Overall revenues have grown at a moderate pace the past 3 years as number of retail stores has grown. Top-line was up 15% to $296 million in 2004 and increased 10% in 2005 $324 million. Gross margins have remained consistent in the 35% range. Operating expenses have been slowly creeping up the past 3 years from 29% in 2003, to 30% in 2004 to 31% in 2005. Not drastic but I'd prefer to see operating expenses declining as a % of revenues as those revenues grow.

Net margins have been 1.5% in 2004 and 2 1/2% in 2005. GOLF earned 50 cents a share in 2005. Note as always this includes removing pre-ipo charges and debt servicing on debt paid off on offering. At $15, GOLF will be trading 30 X's trailing earnings.

With their aggressive store opening plan in 2006, GOLF should be able to grow revenue another 10%-15% in 2006. I think margins will be in the 2% - 2 1/2% ballpark for 2006, quite similar to '05. GOLF has not really been able to establish any economies of scale, I just don't see them able to ramp net revenues quickly going forward. The bottom line should grow pretty much in line with top-line revenue growth. This means that GOLF will probably grow the bottom line 15% of so in '06 to $0.55 - $0.60 cents a share. At a $15 pricing then, GOLF will be trading 25 X's 2006 earnings.

A glance at how GOLF compares with GGXY.

GGXY - Golf Galaxy. $186 million market cap at $17 currently trading 1 X's trailing revenues. 3 1/4 X's book with no debt. Trading 25 X's 2006 earnings with a 30% expected growth in revenues.

GOLF, Golfsmith. $240 million market cap at $15. At $15 would be trading 0.8 X's trailing revenues and 4 1/2 X's book value. At $15, 25 X's estimated 2006 earnings with 10-15% expected revenue growth.

Conclusion -- I wasn't thrilled with GGXY when it debuted and I'm just not enamored with GOLF either. GGXY has done okay. It did quite well in the market move up October through May as investors seemed to mistakenly think it was another ctrn/zumz/vlcm etc...It wasn't and GGXY lowered forecasts last quarter. All in all though it has done okay and I'd expect similar from GOLF. I'm just not thrilled with this space though. Golf retailing really has been a flat segment the past 5 years, but competition has grown swiftly. You've got an ever increasing number of well funded and popular competitors going after a segment pie that hasn't grown much overall.

GOLF much like GGXY in my opinion just doesn't have enough to differentiate themselves to really outgrow that competition. Plus recently the hugely successful general sporting goods retailer, Dick’s Sporting Goods, announced the opening of golf specialty stores. I would be willing to wager that in the metro areas in which DKS attaches a golf specialty store to their existing stores, both GGXY/GOLF will see same store sales weakness. DKS is just one of a slew going after the same pie, and these smaller specialty players like GGXY/GOLF really have their work cut out for them. I think GOLF will do okay in a decent economic climate as new stores drive solid 10-15% annual earnings increases. I think though that a GGXY/GOLF will really struggle in a stagnant or slowing economy and witness significant same store sales slowdowns. Those 2% - 2 1/2% margins could easily disappear if the overal segment pie shrinks at all.

Decent ipo, I simply do not like the heavy competition coming from many angles, all of whom are selling the same products as GOLF. Not nuts about the margins here, margins indicative of a tough competitive landscape. I'm passing here.

June 14, 2006, 9:36 am


BWTR with a total hatchet job done on it by an analyst in something called the "Wall Street Transcript; today. She compared BWTR to the dot.com ipo's of yesteryear.

I added here today $10-$10 1/2.(edit, closed in the $9's so added a bit early)

Yep there risks with any young small company going forward. But BWTR will grow revenues 200% in '06 I believe and will earn in the 25 cent per share ballpark. The analyst in WST was quote as saying this sort of anticipated growth was 'pie in the sky'. Not really as BWTR will have two revenue generating deals in their pocket for full year '06 that they've not had previously. I suspect '07 earnings could easily be 40-50 cents a share.

Again I can understand why a small risky company may not be someone's cup of tea but the comparison to the old dotcom ipo days is foundless and outrageous.

BWTR has positive net margins and a sub $200 million market cap. At $10 it is trading 20-30 X's my forward earnings estimates for '07. How is that remotely dotcom'ish? Those ipos often had $2+ billion market caps, no net margins and no earnings estimated going forward,,,,well going forward ever.

Just a total hatchet job in comparing this ipo with those dotcom's of yesteryear.

It is fine if she does not like BWTR that is what makes a market. I happen to like it here around $10. However she is completely off base in comparing bwtr to the worst of the worst ipos we've ever seen. It's not. I analyzed that dreck coming out in 2000, those bottom of the barrel dotcoms such as snowball.com and the like. There is NO comparison with BWTR and those things, none. BWTR is simply a small growing company that has recently turned the corner into profitability. I've no issue with an analyst or participant not liking it for a variety of reasons --- these little fast growing companies nearly always do look expensive on a trailing basis. However to throw it under the bus by stating bwtr ipo reminds one of the worst of the worst ipos ever to hit the market is ridiculous. c'mon Sanford, show a little responsibility here.

Amazed too they took this down 20% today on that Sanford analyst comment in this 'Wall Street Transcript' thing.

June 12, 2006, 7:51 pm

in the news

tradingipos.com interviewed for another cnnmoney.com ipo article:


June 11, 2006, 7:25 am

Week of 6/12

6 on the schedule this week, we'll see if market conditions allow all to price.


LOOP - LoopNet

LOOP- LoopNet (around as currently structured since 2001) plans on offering 6 million shares (2 million from insiders) at a range of $11- $13. Credit Suisse is lead managing the offering, Thomas Weisel and Pacific Crest co-managing. Post-offering LOOP will have 37.5 shares outstanding for a market cap at $12 of $450 million. IPO proceeds will be used for general corporate purposes.

From the prospectus:

“We are a leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace....Our online marketplace, available at www.LoopNet.com, enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease by submitting detailed property listing information in order to find a buyer or tenant. Commercial real estate brokers, agents, buyers and tenants use the LoopNet online marketplace to search for available property listings that meet their commercial real estate criteria.”

LOOP through www.LoopNet.com allows the sources of commercial real estate supply and demand to meet on one online destination. Essentially LOOP, through the website, is an online commercial real estate marketplace. As of 3/31/06, LOOP had approximately 360,000 listings for more than $296 billion of property available for sale and more than 2.8 billion square feet of property available for lease. Listing a site is free of charge as is searching for listings.

The commercial real estate market is comprised of office, industrial, retail, multi-family (apartment complexes), and land for development. This market is loosely valued at over $5 trillion in the United States and primarily relies on brokers and agents to facilitate sales/ leases of property. Historically much of commercial advertising has been placed locally through newspaper, on-site ads, mailers etc... Historically there has not been a central database for listings as exists with residential real estate. LOOP since inception has attempted to fill this need by creating one central source for all commercial real estate listings. Ambitious.

LOOP averaged 500,000 unique monthly visitors in 2005 and 590,000 unique visitors per month first quarter of 2006. Content is user generated as listings are placed by those visiting the site.

Okay, how does LOOP make money off of these 360,000 online commercial real estate listings? All users of the site must register, providing the basic e-mail address, name etc. Registration is free, however basic registration has limited access to the site and listings. For complete access LOOP offers Premium Memberships for $49.95 monthly, $44.95 monthly if paid quarterly, and $39.95 monthly if paid annually.

Listings are placed free, searching is free LOOP makes money from Premium Memberships pretty much exclusively. LOOP derives 80% of their annual revenues from Premium memberships to their site. As of 3/31/06 LOOP had 1.2 million Basic members and 65,000 Premium members. Those 65,000 then are LOOP's revenue base.

Why would someone choose to pay for LOOP's service when listing and search are free? Good question, here is the answer. While a basic member can list and search properties, those listings will only be seen by Premium members and the only listing that basic members will be able to see are those listed by Premium members. In other words a Basic member to the site cannot view listings by other Basic members and any listings they may place cannot be seen by other Basic members. Premium members can view all listings and any listings placed by Premium members can be viewed by the entire 1.2 million subscriber base.

It would seem to me that the Basic membership would work for an entity with one to a few listings or needs while high volume commercial real estate participants would need the Premium if interested in utilizing the LOOP online marketplace. There are also a few other perks for Premium membership, including automatic prospect lists for and daily e-mail alerts for specific search criteria. The driver to shift Basic members to Premium member status (and thus revenue generators) is the complete access to listings that Premium membership provides.

So how is LOOP doing shifting Basic members to paying members? Since inception, the average monthly rate of conversion of basic members to premium members has been approximately five percent, the average monthly cancellation rate for premium members has ranged between three and five percent. LOOP is churning roughly 50% of their premium membership base annually, although they are converting Basic members at a greater number. Result is Premium memberships have been steadily growing annually the past 3 years.

The growth strategy is fairly obvious-- LOOP wants to expand their membership base and convert more Basic members to revenue generating Premium Members.

In addition to LoopNet.com LOOP also operates BizBuySell, an online marketplace for businesses for sale. Business sellers pay a fee to list their operating businesses, and interested buyers can search listings for free. As of March 31, 2006, BizBuySell contained approximately 38,000 listings of operating businesses for sale. BizBuySell runs on a slightly different business model then LoopNet.com as those listing pay a fee while searches are free. There are also membership levels.

Note that there is advertising on both sites, however it is not a major source of revenues for either currently.

A fairly straightforward business model. LOOP stands to benefit from a strong commercial real estate market and in turn, it would stand to reason from a soft United States commercial real estate market. While all this sounds fine and good, the truth always comes out in the financials. Whether LOOP's business plan is working will be shown in quarterly revenue growth trends, margins, margin expansion and bottom line growth.


Approximately $2 a share in cash post-offering no debt.

The financials look quite strong here. LOOP has booked a quarterly profit each quarter the past 3 years. In this time they've generated strong positive cash flows at a pace often not seen in such a young company. This business model is clearly working and working well. Thus far LOOP's trends are everything you want to see in a company coming public:

1) 9+ straight quarters of sequential revenue growth;

2) gross margins are getting stronger annually;

3) operating expenses as a % of revenues are decreasing annually;

The combination of the three trends above allow small growing companies to swiftly grow the bottom line and often gives them powerful future earnings growth. A few IPOs of the recent past exhibiting similar trends include CTRN/ HITT/ VLCM.

Revenues increased 75% in 2005 to $31 million. Gross margins were 88%, the third annual gross margin increase in a row. Operating margins topped 36%, again the third annual increase. Net margins (assuming full taxes) were a strong 24%. LOOP earned 20 cents a share in 2005, fully taxed. At a $12 pricing, LOOP will be coming public 50 X's trailing earnings.

LOOP's trends have continued into the first quarter of 2006. Revenues were up 11% sequentially from the 12/05 quarter making this at least the 9th such sequential quarterly revenue increase for LOOP. Gross margin expanded by 1/2%, operating margins grew 9%. This last number is the key here. LOOP gross margins at 88% have most likely plateaued. However for such a young growing company LOOP is doing a very nice job managing expenses, allowing more of that gross margin to flow down to operating earnings. LOOP, with much of their operating expenses as fixed website costs, has controlled sales/ marketing expenses very nicely. They've grown the business every quarter for three years, but have done so without gutting revenues with massive sales/ marketing expenses. Simply put, LOOP is flowing their revenue growth to the bottom line quite nicely at higher and higher %'s.

Net margins for the first quarter '06 were 30%, up from 2005's full year 24%.

What will LOOP earn in 2006? I think LOOP can grow revenues in the 60% ballpark to $50 million. I also think net margins for the year will approach 33%. Yeah that is 33% net after tax margins.

At those run rates LOOP would earn 40- 45 cents a share in 2006. At a pricing of $12, LOOP would be trading 27 X's current year earnings. Note that cash flows here are even stronger. LOOP could easily do 80 cents a share in positive operating cash flow in 2006. LOOP is currently a money making machine.

27 X's current year earnings for a company growing revenues and net margins this strongly is too cheap. The trends here are very strong and if they continue as they have the past 3 years, LOOP could easily be a $20+ stock.

There are risks, aren't there always:

Economic weakness tends to slow commercial real estate activity. In the '01/ '02 recession commercial real estate slumped badly in some parts of the US. It stands to reason similar in future would stall LOOP's growth.

Barriers to entry here are not prohibitive. LOOP will continue to need their commercial listing base to grow, meaning they need commercial agents/ brokers to continue to list with them. LOOP faces competition from traditional listings such as newspapers and business weeklies. Also LOOP is not the only online source for commercial listings by any means. Yahoo for example offers commercial real estate listings from cityfeet.com. Should be noted that a recent search of yahoo/ cityfeet for commercial retail space for lease in the greater Los Angeles area resulted in only 9 listings. That doesn't seem like a comprehensive listing by any means. Craigslist.org is another potential competitor, a free competitor at that. Currently neither cityfeet/ yahoo nor craigslist come close to LOOP's comprehensive listings though, however the internet is known for innovation and competition and that must be kept in mind. I would not be at all surprised to see Google enter this space in some fashion down the line.

LOOP's principal competitor currently is CoStar (CSGP), although online commercial listings are only a part of CSGP, not the entire business model. From what I've read it appears most high volume commercial agents/brokers/investors that would be interested in such services tend to subscribe to both CSGP/LOOP.

Also 2 sort of similar recent IPOs in the residential listings space have bombed, ZIPR/ SOLD. Note that the residential housing market has slowed while commercial real estate still appears in recovery mode. Also neither ZIPR nor SOLD had remotely as strong trends pre- IPO as LOOP. ZIPR, with high overhead was struggling to reach annual profitability when it IPO'd, SOLD's net margin on IPO were 1/2 of LOOP's.

So yes, there are risks here. I feel though that the extremely strong trends and margins LOOP has been able to display outweigh these risks. The trends/ margins are screaming, 'this model works', regardless of the potential pitfalls or skepticism. I always fall back on the numbers and the trends….and the numbers/ trends here are very similar to the best performing IPOs of the past few years. Sequential quarterly revenue growth over a period of years coupled with margin expansion excite me, regardless of the sector or niche. LOOP has shown an ability to steadily grow their paying subscriber base each quarter, and in turn filter that revenue growth in stronger measure straight through the bottom line. I like this deal, I think it will work very well.

June 4, 2006, 9:04 pm

week of 6/5

Just one ipo on the docket this week, yet the week of 6/12 appears as if it may have 7-8 with a few looking pretty solid.

BWTR - Basin Water

BWTR, Basin Water plans on offering 5 million shares at a range of $8-$10. Janney Montgomery is lead managing the offering, A.G. Edwards co-managing. Post-offering BWTR will have 17.7 million shares outstanding for a market cap mid-range of $159 million. Approximately 1/3 of the IPO proceeds will be going to fund capital expenditures, 1/3 to repay debt, and 1/3 for general corporate purposes. President and CEO Peter L. Jensen will own 16% of BWTR post-IPO. Mr. Jensen is not selling any stock on the offering, nor will any insiders.

From the prospectus:

“We design, build and implement systems for the treatment of contaminated groundwater.”

BWTR is involved with water treatment at the well level. According to the company, they've developed a proprietary, ion-exchange treatment system that reduces groundwater contaminant levels in an efficient, flexible and cost-effective manner. Ion-exchange is a process that treats contaminated water by using resins to chemically bond with specific contaminants, thus removing them from the treated water. BWTR's process uses multiple beds of ion exchange resins through which the water flows until it meets appropriate contaminant levels. The system is installed at the well-head and is scalable to treat various volumes.

BWTR possesses 3 current patents to protect this system.

The EPA has estimated that water contaminant treatment projects in the United States will require $53.2 billion in investment over the next 20 years. Groundwater is the main source of drinking water for approximately 50% of the US population. Population growth estimates forecast an increasingly greater need for groundwater supply going forward. Much of that potential groundwater supply is contaminated, and services from companies, such as BWTR, figure to be in increasing demand going forward. There is actually a decent level of 'barriers to entry' here due to government regulation. To be put into use a process needs the EPA designation of 'best available technology' a designation BWTR's process/ system has received.

They market their system to utilities, cities, municipalities, special districts, real estate developers and other organizations that supply water. The purpose is for use in treating groundwater sources that do not comply with federal or state regulations due to the presence of chemical contaminants. BWTR has focused on ridding groundwater of three contaminants: arsenic, nitrate and perchlorate. Not so coincidentally, these three contaminants have been a focus of the EPA (Environmental Protection Agency) and state governments. For example, the 2006 EPA guidelines call for a sharp reduction in the groundwater arsenic MCL standard from 50 ppb to 10 ppb. Also the State of California and Commonwealth of Massachusetts have recently called for a reduction in perchlorates.

While BWTR began business in 1999, they're currently still in post start-up phase as they've only begun generating any revenues in 2002. They currently have 50 systems delivered in California and Arizona with an aggregate installed capacity of approximately 86,800 acre-feet per year or approximately 28.3 billion gallons per year. BWTR's business to date has focused on only the southwest US, one of the swiftest growing regions of the US and characterized by a shortage of readily obtainable drinking water to sustain said rising population base.

Customers include American Water, a division of RWE AG, California Water Service Group and American States Water Company, three of the largest investor-owned water utilities in the United States based on population served. Top 4 customers accounted for 71% of 2005 revenue. Contracts typically have a term of five or more years and/or are sold outright to customers. In 2005 outright sales accounted for over 80% of revenue and system sale prices ranged from $100k to over $4 million apiece.

BWTR feels it has advantages over the competition dues the small size of their system that can easily be placed at the wellhead and process large volumes of water. Apparently many traditional systems have been bulky and deployed at water facilities not the wellhead. The size and relative ease and speed of implementation have given BWTR a cost advantage, according to BWTR.


$1 1/2 per share in cash, no debt.

3 X's book value at $9 per share pricing.

Well I've buried the lead in this analysis piece. BWTR's financials for 2006 and beyond will look nothing like 2005 and previous. 2 recent and very significant developments are the cause.

In December, 2005 BWTR entered into a strategic sales and marketing agreement with Shaw Environmental, an affiliate of The Shaw Group (SGR) to market BWTR's arsenic treatment system on an exclusive basis to water providers in 18 states. Secondly Aqua America (WTR), the largest U.S.-based publicly-traded water utility, is in late stage negotiation to co- market BWTR's system. Under the terms of the proposed strategic relationship, Aqua America and Basin Water would work together to treat and recover sources of water supply that have been impacted by nitrate and arsenic.

These two deals give BWTR credibility and geographic expansion. In 2005 they marketed their system solo to 2 states. With the SGR deal alone their system will now be marketed in 20 states, with SGR marketing only their treatment system none other. In addition these deals will significantly raise BWTR's 2006 revenue. BWTR goes into great detail about why their system is an attractive solution. For me the fact that SGR/ WTR are interested in them as an exclusive solution/ partnership counts for far more. These are very important deals for a small company like BWTR. Very important.

The Shaw agreement is for 2 years. BWTR has agreed to sell SGR their systems at a discount. SGR will maintain sales exclusivity in 18 states provided revenues from BWTR's system sales top $2 million annually in each state. If lower then $2 million in any state, BWTR will be free to either sell directly in said state or locate other strategic partners. The term of the deal is 2 years with an option for SGR to extend assuming revenues from SGR for BWTR's system top $19 million total in the 2nd year. SGR has agreed to purchase a minimum of $5 million worth of BWTR product in 2006. A lot of numbers --- My take is that '06 revenue from SGR will be at least double that $5 million minimum, possibly triple. Why? Well SGR wouldn't agree to an option at a certain level unless they felt they'd sell well above that number the 2nd year. SGR has the advantage in this deal being the much larger entity and they will want the discretion of renewing the option or not. That threshold for 2007 revenues is $19 million, meaning SGR believes they will be purchasing a larger dollar amount of BWTR's systems in '07 then that figure. That way SGR gets to decide if they would like to continue the relationship, not BWTR. SGR simply wouldn't agree to terms on conditions other then continuing at SGR's discretion. Just the way it works.

In December 2005 alone after the deal was signed, SGR purchased $1.6 million worth of BWTR's systems. At a full year run rate for 2006, knowing what we know about the deal, I would estimate SGR related revenue to BWTR in the $10-15 million range minimum. In 2007, $20+ million in revenue should come directly from SGR.

It should be noted (and this is important) that the SGR deal does not cover Arizona and California, a geographic area in which BWTR has received all revenues to date. BWTR will be free to continue to market and sell their system solo in those 2 states, something they will most certainly continue doing.

Let us look at 2005 financials and attempt to forecast '06 based on the impact of the above deals.

In 2005 BWTR grew revenues from '04 levels of $4 million to $12.2 million. Gross margins were 42%. Margins on sales were much higher, the gross margins appear lower than reality due to 20% of revenue derived from 5+ year contract placements. Those revenues are booked over the life of the contract. SGA and R&D doubled in 2005, while revenues tripled. Good sign. Going forward as revenues grow, keep an eye on controls over these two line items. A key to BWTR's future earnings power will be for them to continue to grow these expense line items at a much slower rate then revenues. This is always a key for small fast growing companies.

Operating margins in 2005 were positive for the first time in company's short history at 9%. Net margins (after eliminating debt paid off on offering), factoring in tax were 6%. Earnings per share for 2005 were 4 cents. Trailing PE at $9 is 225.

2006 is very difficult to forecast. My hope is that first quarter numbers will be added to the final prospectus. If so, this portion will be updated just prior to pricing. Backlog as of 12/05 more then doubled to over $75 million. In 2005 BWTR booked about 1/3 of their total backlog. Just using those broad numbers puts BWTR's 2006 revenues in the $25 million range. Conservatively factoring in the SGR deal and the pending WTR partnership, I think BWTR can triple their revenue in 2006 to the $35 million level. This is a ballpark number. I believe gross margins will compact a bit as SGR is receiving a discount on purchased systems. However, operating expenses should decrease substantially as a % of revenue. Conservatively at this run rate I believe BWTR can lift net margins to the 10%-12% range. This would mean roughly 25 cents a share in 2006 earnings for BWTR. At $9 that is 36 X's 2006 estimated earnings.

BWTR does have numerous public competitors however none are quite the public pure-play of BWTR.

Calgon Carbon (CCC) is probably the closest while LAYN, Layne Christensen and ROH, Rohm & Haas have segments of their business which compete with BWTR. CCC is expected to break even in 2006/ 2007 and the stock price has not done much overall the past few years. LAYN/ ROH are quite profitable overall and have seen tremendous stock performance the past 3 years. I think going forward if BWTR is able to leverage these important deals into profits, the stock will do quite well.

Risks - Technology seems to be the big risk here. Even though most of BWTR's business is based on long term contracts and outright sales, there is always the chance a competing water treatment technology could eventually become 'the standard.' Currently it appears BWTR's treatment process is in demand as evidenced by the deal with SGR and the pending deal with WTR. This is not a shorter term concern but one to keep an eye on.

Note too that BWTR has had several accounting issues. This is not uncommon in a start-up without the budget for substantial accounting staff/ outsource. They've hired to remedy the situation. I suspect it will not be much of an issue going forward, still worth mentioning.

Also expect a dilutive secondary from BWTR sometime in the first 6 -15 months public. As they expand operations swiftly with the SGR/ WTR deals, they could very well need more capital quickly for manufacturing. It is possible that IPO monies and future cash flows could provide this capital, but I suspect BWTR will be back selling additional shares in a secondary.

Conclusion - I like this deal. I think the SGR exclusive deal and the pending WTR deal are what makes this offering attractive in range and a few dollars above. This is the sort of small deal/ company in which there is a lot of things than can potentially go right for them over the next few years. If they do the stock price will be much higher then $8-$10. The longer term population/water trends are in their favor, plus revenues should ramp impressively in 2006. Factor in the light initial market cap and the complete absence of any leveraged buyout entities and this is a nimble deal.

The key here is for BWTR to turn these two deals into a solid bottom line number. I think it is possible and if everything falls into place they're set-up to post an impressive number in 2007. At my expected 200% revenue growth in 2006 and 36 X's '06 estimates, BWTR is attractive. Yes, many things can/ do go awry with small/ new companies, but I like BWTR's chances. I like this deal, this is the sort of small offering with new contracts not yet recognized (a la LQDT) that have always worked in he IPO market their first year out. I suspect similar with BWTR.

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