1. Small Cap Tech Update
April 14, 2010 TARGET N/A
Recommendation: N/A
BREAKOUT 2010: SMALL CAP TECH
Canadian publicly listed Small Cap Tech companies have, as a group, significantly outperformed The S&P TSX Index over
the past year. Even still, the Small Cap Tech group is trading at an historic discount to the S&P/TSX Index based on P/E
multiples over the past five years. As a result, we believe that there is more fundamental value in the group because the
earnings discount to the S&P/TSX appears unwarranted.
Recovery in technology spending is forming a solid V-shape, repeating a similar pattern to the most recent 2002-2004
technology rebound, which lasted approximately nine quarters. We are in the third quarter of a similar, but more
fundamentally sound, recovery.
Unlike in 2002, earnings are more prevalent, and balance sheets are generally more solid. In addition, the macro
economic conditions appear to be more robust than they were in 2002. A transition from the fixed web to the mobile web
is a fundamental and worldwide catalyst that could represent a 10-fold increase in connectivity among the world
population. The impact of convergence among the mobile web, social web, and utility computing ecosystems could be
more profound than the adoption of the internet itself during the 1990s. Below are some example companies within the
S&P/TSX Small Cap Tech sector that participate within the identified ecosystems.
Total
Cash & LTM LTM 1 Year % TEV/LTM Revenues, 3
Market Cap Equiv. Revenues EBITDA Price Total TEV/LTM Yr CAGR %
Share Price ($mm) ($mm) ($mm) ($mm) Change Revenues EBITDA [LTM]
Mobile Ecosystem
Bridgewater Systems Corporation (TSX:BWC) $ 10.35 $ 253.0 $ 67.3 $ 66.7 $ 12.0 161.5 2.8x 15.5x 29.1
Redknee Solutions, Inc. (TSX:RKN) $ 1.67 $ 99.4 $ 23.5 $ 50.8 $ 6.5 297.6 1.5x 11.7x 9.4
Sandvine Corporation (TSX:SVC) $ 2.11 $ 286.8 $ 88.4 $ 72.1 $ (8.3) 106.0 2.8x NM 21.6
MOSAID Technologies Inc. (TSX:MSD) $ 21.78 $ 256.2 $ 70.3 $ 69.3 $ 40.6 87.9 2.7x 4.6x 20.8
Sierra Wireless Inc. (TSX:SW) $ 8.90 $ 276.4 $ 134.4 $ 526.4 $ 15.8 52.5 0.3x 8.4x 33.5
DragonWave Inc. (TSX:DWI) $ 9.83 $ 363.1 $ 104.0 $ 118.6 $ 15.9 425.4 2.2x 16.3x 85.8
Tranzeo Wireless Technologies Inc. (TSX:TZT) $ 1.42 $ 66.0 $ 1.8 $ 11.6 $ (3.9) 287.0 5.6x NM -13.8
Vecima Networks Inc. (TSX:VCM) $ 7.00 $ 160.0 $ 0.8 $ 97.0 $ 11.3 42.0 1.7x 14.8x 3.8
iseemedia Inc. (TSXV:IEE) $ 0.15 $ 10.5 $ 2.1 $ 2.4 $ (3.4) 40.9 4.1x NM 94.4
Multiplied Media Corporation (TSXV:MMC) $ 0.17 $ 21.8 $ 5.0 $ 0.3 $ (4.0) 164.3 56.1x NM NM
Payments and Transaction Processing
GuestLogix Inc. (TSX:GXI) $ 1.80 $ 114.6 $ 9.4 $ 18.6 $ 1.0 354.5 6.1x 119.0x 159.5
PNI Digital Media Inc. (TSXV:PN) $ 1.70 $ 57.3 $ 6.5 $ 25.0 $ 6.2 9.5 2.0x 8.3x 70.4
Selectcore Ltd. (TSXV:SCG) $ 0.07 $ 7.2 $ - $ 83.0 $ 0.9 300.0 0.1x 10.5x 34.8
TIO Networks Corp. (TSXV:TNC) $ 0.55 $ 25.4 $ 2.2 $ 21.8 $ (0.1) 22.5 1.1x NM 22.9
Cloud/SaaS
Descartes Systems Group Inc. (TSX:DSG) $ 6.32 $ 388.1 $ 94.6 $ 73.8 $ 16.1 55.1 3.7x 16.8x 12.4
iLOOKABOUT Corp. (TSXV:ILA) $ 0.50 $ 15.5 $ 2.2 $ 1.8 $ (2.3) 25.0 7.4x NM 0.0
Cortex Business Solutions Inc. (TSXV:CBX) $ 0.50 $ 68.3 $ 2.5 $ 3.5 $ (3.7) 217.6 18.5x NM 46.8
Source: Capital IQ, Bloomberg, Company Reports
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M|PARTNERS
Member of the Investment Industry Regulatory Organization of Canada (IIROC)
Participating Organization – Toronto Stock Exchange (TSX)
Member Canadian Investor Protection Fund (CIPF)
Research • Trading • Advisory
2. Small Cap Tech Update
April 14, 2010 TARGET N/A
Recommendation: N/A
S&P/TSX vs Small Cap Tech 1-Yr Relative Performance
200
180
42%
160 Outperformance =
Happy Tech Investors
140
120
100
80
Nov-05-2009
Nov-19-2009
Jun-04-2009
Jun-18-2009
Jul-02-2009
Jul-16-2009
Jul-30-2009
Jan-14-2010
Jan-28-2010
Apr-09-2009
Apr-23-2009
May-07-2009
May-21-2009
Aug-13-2009
Aug-27-2009
Sep-10-2009
Sep-24-2009
Oct-08-2009
Oct-22-2009
Dec-03-2009
Dec-17-2009
Dec-31-2009
Feb-11-2010
Feb-25-2010
Mar-11-2010
Mar-25-2010
Apr-08-2010
S&P/TSX Composite Index - Share Pricing Index: Small Cap Tech (Equal Weights) - Index Value
Source: Capital IQ, M Partners
Relative TTM P/E Ratios
30
25
20 32% DISCOUNT =
Historical Opportunity =
More Happy to Come!
15
10
5
0
Nov-02-2005
Nov-02-2006
Nov-02-2007
Nov-02-2008
Nov-02-2009
May-02-2005
May-02-2006
May-02-2007
May-02-2008
May-02-2009
Aug-02-2005
Aug-02-2006
Aug-02-2007
Aug-02-2008
Aug-02-2009
Feb-02-2006
Feb-02-2007
Feb-02-2008
Feb-02-2009
Feb-02-2010
Source: Bloomberg, Capital IQ, M Partners Index: Small Cap Tech - P/E S&P/TSX
*Small Cap Tech Index is made up of 130 technology companies as defined by the TSX with market caps between $5M to $500M
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M|PARTNERS
Member of the Investment Industry Regulatory Organization of Canada (IIROC)
Participating Organization – Toronto Stock Exchange (TSX)
Member Canadian Investor Protection Fund (CIPF)
Research • Trading • Advisory
3. Small Cap Tech Update
April 14, 2010 TARGET N/A
Recommendation: N/A
Small Cap Tech Investors Happy … More Happy to Come!
Small cap tech has significantly outperformed the S&P/TSX over the past year – tech investors should be
happy
Despite 42% outperformance, the index still trades at a 32% TTM PE 3-yr
discount to the S&P/TSX – there is more happy to come 5-yr April 1 Revenue
Median 2010 CAGR
Small cap tech remains a high growth sub-sector - 3 year revenue
Tech 18.5x 15.3x 13.4%
growth has outperformed the index by 86%
S&P/TSX 18.2x 22.2x 7.2%
Global technology sector revenue growth implies recovery … a 2002- Spread 0.32x -7.0x 6.2%
2004 redux but with better fundamentals
Source: Capital IQ, Bloomberg, M Partners
Technology spending recovery in 2002 was v-shaped and lasted 9
quarters
Current indications imply another v-shaped recovery – we are in the 3rd quarter of the recovery
We believe the recovery in spending may be more robust than in 2002 due to the following catalysts:
Transition from fixed to mobile web
Technology replacement cycle
Cloud computing / SaaS
Global Technology Sector Revenue & Y/Y Growth, CQ1:96 – CQ4:09E
$600 40%
30%
$500
Average Y/Y
Growth = 10%
20%
Quarterly Revenue ($B)
$400
Y/Y Growth (%)
10%
$300
0%
$200
Similar Patterns -10%
$100
-20%
$ -30%
CQ3:09E
CQ1:96
CQ3:96
CQ1:97
CQ3:97
CQ1:98
CQ3:98
CQ1:99
CQ3:99
CQ1:00
CQ3:00
CQ1:01
CQ3:01
CQ1:02
CQ3:02
CQ1:03
CQ3:03
CQ1:04
CQ3:04
CQ1:05
CQ3:05
CQ1:06
CQ3:06
CQ1:07
CQ3:07
CQ1:08
CQ3:08
CQ1:09
Revenue ($B) Y/Y Growth (%)
Source: Economy + Internet Trends, Mary Meeker, Morgan Stanley Web 2.0 Summit, October 20, 2009
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Research • Trading • Advisory
4. Small Cap Tech Update
April 14, 2010 TARGET N/A
Recommendation: N/A
ROI Performance of Technology Companies
12 Month Return
100.0
88.4
80.0 72.6
62.9
60.0
% Return
40.0
20.0
0
Mega Cap Large Cap Mid Cap Small Cap
(20.0) (11.0) Large Cap Mid Cap Small Cap
Mega Cap (>$5B) ($5B>X>$1B) ($1B>X>$500M) ($500M>X>$5M)
Count 1 6 3 130
Source: Capital IQ
Like Finding a Needle in a Needle Store
There are 130 companies with market caps of between $5M to $500M (See Appendix A)
Small caps have significantly outperformed mid and large caps
Over 27% (35/130) of small caps were homeruns, returning over 100%
Only 34 of 130 companies showed negative returns
Only 10 of 35 homeruns have analyst coverage
Median daily volume on the homeruns were 130,500 (1 year) and 160,000 (3 months)
Median daily dollar value traded were $58,000 (1 year) and $93,500 (3 months)
This is Not 1999 or Even 2002
45% of small cap tech companies are TTM EBITDA positive vs 13.2% in Metals & Mining TSX/TSXV sub-
sector
48% generate cash flow from operations
$0.21 of cash for every $1.00 of market cap
Low degree of leverage - median debt to capital ratio is 10.2%
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M|PARTNERS
Member of the Investment Industry Regulatory Organization of Canada (IIROC)
Participating Organization – Toronto Stock Exchange (TSX)
Member Canadian Investor Protection Fund (CIPF)
Research • Trading • Advisory