Burnham's Beat

Dear Microsoft: Please Buy Plaxo

Dear Microsoft:

I saw over at TechCrunch that Plaxo is for sale.  Now, I realize that you guys may not know what Plaxo is because you didn't create it and it isn't located within 25 miles of Redmond, WA, but let me explain to you why I think it might make sense to part with a very small portion of your $21.5BN in cash to acquire it.

You see Plaxo is, in theory, one of the single most useful plug-ins for Microsoft Outlook.  I say in theory, because Plaxo is only useful to the extent other people you know also use it.  That's because Plaxo automatically synchronizes contact details between yourself and other Plaxo users.  In theory, if everyone used Plaxo, then your contact list would always be up-to-date and 100% accurate.  This would be fantastic for me and just about every other Outlook user because it would not only insure that we have always have accurate contact data but it would eliminate the numerous annoying e-mails we get from people throughout the year who are changing jobs, cell phone numbers, etc.

As one of the earliest adopters of Plaxo, I remember feeling giddy at the prospect of everyone soon adopting Plaxo and thereafter entering into a state of perpetual contact bliss.  Alas, this never happened as a result a lot of creepy spam-like user acquisition strategies and other generally bone-headed moves by Plaxo.  Sometime around 2005, I entered into a state of depressive resignation that my Plaxo-inspire contact bliss would never be realized, but now with the "leaked" news of their hoped-for sale by their bankers, my own hopes have been raised that contact nirvana may yet be achieved.

Why should you guys in particular buy it?  Well I can think of three very good reasons:

1. No one is in a better position to have Plaxo reach its goal of near universal adoption than you guys.  You have the clout to embed Plaxo into Outlook.  In doing so, you would practically guarantee that adoption would skyrocket and as adoption skyrocketed the perceived and actual value of Plaxo to its end users would also skyrocket.
2. Plaxo recently released something called Plaxo Pluse, which is basically a social network built on top of your contact list.  This is a pretty interesting idea and one that holds great promise in existing professional circles where someone's contacts are basically their social network to begin with.  By supercharging Plaxo adoption, you could also rapidly grow Plaxo pluse which would very quickly create a highly credible competitor to Linked-In and probably give you a great chance to establish a professional version of Facebook.  What's more you could buy 100% of this social network for far less that the $240M you shelled out for just 1.6% of Facebook.
3. What with all the other things you guys have going on you may not have noticed that Outlook really hasn't added a significant new feature since, oh, let's be generous and say 2001.  I can assure you as daily user I have noticed this, especially as other mail clients have rolled out all manner of cool new features.  Sure you've added support for all manner of obscure Microsoft products such as Groove, Sharepoint, Microsoft CRM, etc., but in terms of actually adding new features that make my daily task of sending e-mails, scheduling events, and contacting people, I might as well be using Outlook 97 for all I can tell.  Yes, you bought LookOut and attempted to integrate indexed-search into Outlook, but the Windows team screwed this up miserably when they insisted that the whole thing be integrated into Windows Desktop Search.  Now I know you guys are great developers and all and that no one else appreciates the massive complexity of adding features to a mail client, but perhaps you guys could suck up your pride a bit and actually go out and buy a feature that is truly useful to your patient, but increasingly suffering users.  After all, if there's one application that I spend the most time in, its Outlook, yet this application seems to have been completely devoid of innovation in recent memory while folks such as Zimbra and GMail make it look like it was coded in Fortran in the 70's.  So, do us dumb-ass end users a favor and throw us a bone, add something new, sexy, and truly useful to Outlook (and don't screw it up the way you did LookOut).

Now I know that buying Plaxo won't be easy for you guys.  After all it's a hosted service that uses the Internet and does not take an hour to install or require you to type in a 30 character sequence of random numbers and letters.  Still, take it from me, it's actually a useful application and it has the potential to help reestablish the relevancy of Outlook in an age when it is increasingly looking like it will soon go the way of the dodo bird.

Sincerely,

Bill

Top 10 Software Stocks of 2007

2007's list of Top 10 Software Stocks is a mixed bag.  There is an IPO, a few turn-arounds, some SaaS companies and some security companies, but no consistent themes.  To be sure, Software as a Service and appliance-based software remain perhaps the most important software themes right now, but they don't dominate the Top 10.

To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service.  So, without further ado, here are the Top 10 Software Stocks of 2007:

1. ZIXI
   Price Change: 287% Ticker: ZIXI
   Comment: Pioneer in SaaS-based digitally signed e-mail and prescriptions sees stock soar as revenue growth picks up and speculators target stock.
2. VM Ware
   Price Change: 193% Ticker:VWW
   Comment:  The software industry's most anticipated IPO of 2007 lived up to its top billing.  VM Ware dominates the rapidly growing virtualization space and the market has rewarded it with a premium price.
3. Phoenix Technologies
   Price Change: 186% Ticker: PTEC
   Comment: Living up to its name, PTEC rose from its own ashes in 2007 on the backs of successful restructuring and new management team.
4. BlueCoat Systems
   Price Change: 175% Ticker: BCSI
   Comment: BlueCoat saw rapid growth in its core markets of WAN security and acceleration as well as increased adoption of appliance-based solutions by the security market in general.
5. EBIX Inc.
   Price Change: 162% Ticker: EBIX
   Comment: EBIX accelerated in 2007 as its focus on providing Internet solutions to the insurance industry helped it rapidly grow revenues while avoiding any fallout from the problems hitting the rest of the financial sector.
6. Innodata Isogen
   Price Change: 148% Ticker: INOD
   Comment: Innodata saw revenues accelerate as its "flat earth" approach to content management and production gained favor with customers.
7. Vasco Data Security
   Price Change: 136% Ticker: VDSI
   Comment: Years of trying to convince banks to deploy authentication software and tokens (as well as a few hackers making some big scores) finally paid off in 2007 as Vasco benefited from a  surge in interest in multi-factor authentication.
8. Broadvision
   Price Change: 130% Ticker: BVSN
   Comment:  After a near death  experience in 2006, Broadvision bounced back as a stable and profitable player in the content management space.
9. Concur
   Price Change: 126% Ticker: CNQR
   Comment:  This SaaS poster child benefited from its domination of online T&E reporting as well as software investor enthusiasm for all things SaaS.
10. Taleo
    Price Change: 118% Ticker: TLEO
    Comment: Taleo saw its stock rise as investors began to recognize the importance of the talent management sector and wanted to own the #1 player.
    

Stratify: A Post-Bubble Success Story

So Iron Mountain, the world’s biggest record management company, announced today that they are going to acquire Stratify, the leader in legal eDiscovery,  for $158M in cash. Stratify just happens to be the first early stage investment I ever made and I thought I would write a bit about the deal because I think it’s an interesting story of a “bubble” company that went through some very tough post-bubble times but ultimately achieved success thanks largely to the perseverance and flexibility of a great team. This is a long post but I think VCs, entrepreneurs and investors will find many of the details interesting.  Before I get into that though I just want to congratulate all the people at Stratify, especially George, Meena , Joy, Sanjeev, Hakan, and Ramana.  You guys hung in there in the face of a lot of adversity and you deserve all your success. 

A Bubblicious Beginning…
I made the original investment in Stratify back in September of 2000, although it wasn’t called Stratify then it was called Purple Yogi and it wasn’t focused on legal eDiscovery back then either , it was focused on a “widget” that automatically categorized news and information in a way that enabled consumers to discover related information easily.   Underneath the widget was an incredible unstructured data management platform built by a team of technology “rock stars”.  While Purple Yogi had undeniably amazing technology (man was it cool!), its business model was a little less impressive in that it really didn’t have one, which kind of explained why it didn’t have any revenues at the time either.  I am embarrassed to say it now, but I invested what was clearly a crazy “bubble” era valuation in their first round of VC funding. That said, 2.5 months after we put that money in, the company raised another round of capital from a new lead investor at an up-round valuation and I was looking at a nice mark up on my first early stage deal in less than 3 months.  I had gone from crazy to genius in 3 months!

Reality Sucks
Reality soon set in though.  As the consumer advertising market collapsed in the wake of the bubble bursting it was clear that Purple Yogi wasn’t going to be making any money selling advertising alongside its widgets, so we decided to focus the business on building an enterprise version of the technology.  This had been part of the plan all along, but it now became the sole focus of the company.  In conjunction with the new focus, we brought in a very accomplished enterprise-focused CEO, made a lot of painful staff reductions, and changed the name to a more corporate sounding “Stratify”.

The newly christened Stratify focused on building a world class unstructured data management platform and thanks to its fantastic tech team it quickly had an awesome product.  For the next two years Stratify tried its hardest to make this business work and it actually had a good deal of success selling to some of the most sophisticated buyers of information management software in the world.  The only problem was that every sale was like fighting trench warfare because Stratify was selling a very “heavy” traditional enterprise software product that not only required customers to write a very large up front software license check, but also required them to make significant investments in ancillary software and support services.   What’s more, because Stratify’s software was so sophisticated and so high-end the addressable universe of potential customers that could A) understand the value it brought and B) had a big enough problem to justify buying it was actually pretty small. The reality was that they had a fantastic product in what was effectively a very small market.  Everyone put their heads together to try and figure out how to build the business faster, but in many ways the company was stuck.  And then something totally unexpected and very fortuitous happened:  I got sued.

Thanks for Suing Me!
In late 2002 I got sued because I was on the board of another company that was embroiled in a legal dispute with its founder who decided to sue the board and company.  As anyone who has had the pleasure of getting sued knows, one of the first things that people do after getting sued is that they collect all the information, typically mostly e-mails, surrounding the issue(s) in question and review them to try and see what the facts of the matter are.  Shortly thereafter you are usually required to give most of these e-mails to the person suing you in a process that lawyers call “discovery”.   As I tried to sift through the morass of e-mails related to this case, I immediately thought of Stratify and asked the CTO if it might be possible to use Stratify’s system to review the e-mails.  The CTO told me that it was in fact possible and that the crack tech team had actually been working on some skunk projects that could be adapted to this purpose.  They quickly cobbled together a makeshift solution and after some initial tests we were all uniformly amazed at how well the system performed and how much easier it was to review e-mails when Stratify’s technology had been used to filter and classify them first.  I was even more amazed when I asked some lawyer friends and they told me that large law firms can easily pay $500K to review e-mails for a single large case.  That sounded like a very promising market.

As it happens, at the same time that we were just starting to think about legal discovery as a potential market for Stratify’s technology, a large software company, who had been flirting with the company for awhile, made a surprise offer to acquire the company as they sensed that due to investor frustration with the slow growth of the enterprise business they might be able to acquire the deal on the cheap.   While I personally thought that there couldn’t be a worse time to sell, practically every other investor wanted to take the deal. They were fatigued and generally freaked out by the market, which at that point in early 2003 was just about reaching rock bottom after almost 3 years of declines.  We settled on a compromise where we took the existing cash in the business and bought out everyone that wanted to sell, which turned out to be almost everyone but us.  After closing that transaction, I set out to try and raise another small round of funding from other VCs and despite a few months of trying I didn’t get a single taker, despite the fact that the legal eDiscovery business had quickly moved from product concept to making a few large sales in less than 6 months.  Nobody was in the mood to take a risk back then.

A Perfect Match
As it turned out though, the legal discovery business not only began to pick up steam, it was quickly becoming clear that the opportunity was even larger and more attractive than we had hoped.   It was like night and day from the enterprise software business.  Instead of 9 to 12 month sales cycles we now had 2 to 4 week sales cycles.  Instead of having to get internal IT to sign off on a laundry list of integration and implementation issues, we sold the product as a fully hosted SaaS solution that was up and running in a matter of days.  Instead of making one big sale per customer, we could make numerous small sales, often to the same partner at a law firm.   Finally, instead of having a very small set of potential large enterprise customers, we now had every law firm in the world and any person or company that had been sued or was suing someone as a potential customer.  Business was so good that Stratify stopped trying to raise the extra capital from VCs and in fact never raised another dollar of equity financing.

I had to resign my board seat at Stratify when I left Mobius, but for the next few years, with the able assistance of Jason and Chris, the team kept building the eDiscovery business to the point that it was clearly a very successful business.  I stayed in touch with the team and tried to offer encouragement and assistance, but they didn’t need any help; they finally had a market and a business model that took full advantage of their fantastic technology.  With growth and success came multiple suitors and it was inevitable that one of them would offer a deal that made too much sense to pass up and that’s exactly what happened today.

Lessons Learned
I learned a lot of investment lessons from Stratify, the most important of which are:

1. Don’t underestimate the value of a great technology team.   Great tech teams can quickly adapt a product to suit changing markets and priorities.  They also create products and technology with lasting value that can be leveraged in multiple ways.
2. If at first you don’t succeed, find a new market and/or a new business model.   It’s often said that very few start-ups achieve success with their original business plan and after my Stratify experience I believe it.  Start-ups should always keep an open mind about potential changes in business model or market focus that might increase the chances for success and should be honest with themselves when it is clear that they are “stuck”.
3. When everyone else is selling, it’s not a bad time to think about buying.  In the public markets they call it capitulation; in the private markets they call it fatigue.   It’s hard to fight the urge to run with the herd, but if you can, you can often make a lot of money.

Venture investments can be real roller coasters.  Stratify went through two business model changes before they found the market, model and product that clicked .  Through it all a core team of people stuck it out and ultimately built a great business that everyone can be proud of. Congrats again to all involved!

Contributors Wanted: M&A & IPO Transaction Lists

The other day I published some lists of M&A and IPO transactions in the Software and Internet industries.  A reader made an excellent suggestion that I should turn those lists into Google Spreadsheets and then allow other people to contribute to and use the lists.  This is exactly what I have done and I am now inviting anyone else that would like to contribute updates/edits to the list to e-mail me (just click the "E-Mail Me" link on the left) and I will add you as a contributor to the list.  In return for becoming a contributor you will get several privileges:

1. You will be able to update, edit, and expand the various transaction lists as you see fit.
2. You will be able to use the transaction lists as you see fit.  This includes republishing them on your own blog or website, turning them into an RSS feed, and manipulating them via Google Spreadsheet's APIs. Go crazy, I don't care.
3. Invite other people to contribute and collaborate with the rest of us.

To contribute you will need a Google ID, if you don't have one you can sign up here.

Hopefully we can harness the power of our collective efforts to provide some pretty useful transactions data that will be useful to a wide variety of people.  BTW, I reserve the right to kick out any "contributors" who are free loading and just trying to pick up good content for their site.

As an aside, it's interesting to think of how projects like this may dis-intermediate some of the data brokers that collect, collate and resell this data (such as Factset).  For example, in the financial services industry there are several services that re-sell transactions data to people.  Those folks had better hope projects like this don't take off!

Software and Internet IPO and M&A Lists

Every month I keep a record of all significant public company activity in the sectors I am most interested  in: Software & Internet.   I keep records of all IPOs in those sectors as well as all public company M&A.  I've decided to try out Typepad's relatively new "page" feature by open sourcing these transaction lists.

The links should be good forever and I will try to update the lists each month as I already do this internally.  The lists start in 2004 and are current as of 5/30/07.  Recently announced M&A deals are not listed because they have yet to close.  It's kind of fun to take a walk down memory lane, and see just what has happened over the last few years in each sector.  So without further ado here are the lists:

Internet IPOs
Internet M&A
Software IPOs
Software M&A

If you see anything missing or anything that needs a correction just e-mail me.

Indian Outsourcers: Open Source's Best Friend or Worst Enemy

In the past couple of weeks I have had several conversations in which Indian IT outsourcing shops have come up in the context of Open Source.  Several Open Source firms have mentioned that Indian outsourcing shops are becoming very good customers and in some ways are really starting to drive enterprise IT adoption of Open Source.  For example, one Open Source company mentioned to me that several Indian outsourcers were aggressively using their distributions as way to cheaply prototype solutions for clients without having to actually buy a license.  If the clients bought the prototype, the outsourcer could deliver the solution with the "free" open source software embedded in it and stick the client with the maintenance.  The pricing headroom created by the lack of up front license fees in the project allowed the outsourcer to lower prices and/or improve margins on their upfront work, while the Open Source software firms got the back-end revenue stream.  A real win/win.

If this is indeed a real trend (and the logic/economics make a lot of sense) than it would appear that Indian outsourcers are one of Open Source's best friends.  Not only are they driving adoption of the products into enterprises (both overtly and somewhat covertly), but because everyone is hiring them as "experts", their endorsement of open source platforms is likely to start swaying the minds of a lot of internal IT types ("If it's good enough for the experts, it's good enough for us").

Be Careful Who You Partner With
I was pretty much set on this opinion until I talked to an entrepreneur friend of mind who was telling me about his own set-up.  He has outsourced all of his IT to India (it's interesting to note that he has also outsourced his CFO to India, his customer service to the Philippines, and his manufacturing to China).  For his CRM system, his outsourcer recommended a well known Open Source CRM platform and even offered to customize it for his needs.  This would seem to prove the above point in spades expect for the fact that in addition to the customization work the outsourcer offered to do all regular maintenance and support for $10/hour.  This meant that my friend had no need to buy a support contract from the Open Source CRM company which means, being a cash poor entrepreneur, he didn't.

Now the idea of a 3rd party providing open source support is not a new one and is often held out as a convenient Open Source boogie man.  For example, Oracle has made a big deal out of its own efforts to offer 3rd party support for Red Hat's Linux distribution.  However, big firm's such as Oracle are never going to be the low cost providers of support and are not likely to view 3rd party support as a core business.  That's not true for the outsourcer's though.  They are definitely focused on being cost competitive.  What's more, support services have the potential to become a critical component of their business models as it gives them a means to not only generate more stable non-project based revenue streams, but also a persistent connection to their customers.  After all, what better way to amortize their up-front training costs and ensure continuing proficiency than to have their own troops continue to support Open Source products once they are deployed.

A New Chapter In Open Source?
It is interesting to consider how this might all turn out as it may lead to a new chapter in the Open Source movement, which seems to have had 3 major chapter to date. The first chapter was the relatively long process of building a grass roots movement to embrace Open Source.  The second chapter was largely about big companies selectively co-opting elements of Open Source in an attempt to commoditize competitors' products (IBM's masterful embrace of Linux as a way to kill off Windows NT's march into the glass house comes to mind).  The third chapter, our current place in the story, is characterized by the rapid growth and financial viability of Open Source companies combined with a competitive response from some of the same proprietary software firms that now belatedly realize they have created a monster.  At this rate, the forth chapter may well be a battle between outsourcers, who seek to use Open Source as way to commoditize all software, and Open Source firms who seek to build sustainable support businesses without giving away the farm.  Alternatively this chapter could end up witnessing a strong alliance between the two sets of firms which results in a win/win for both sides (and a lose/lose for proprietary software firms).  From my perspective, it's not clear right now which way things are going to go, but it is clear that things will likely be fun to watch.

Top 10 Software Stocks of 2006

Software stocks may have only performed in-line with the rest of the market, but these stocks were at the top of the class.  The easiest way to make this list in 2006 was to be bought by a strategic acquirer such as IBM, HP, pr EMC.  Other than that, it's pretty much a grab bag of stocks but medical software stocks were particularly strong, as were open source and VOIP related stocks.

To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service.  So, without further ado, here are the Top 10 Software Stocks of 2006:

1. Interactive Intelligence
   Price Change: 340% Ticker: ININ
   Comment: Pioneer in enterprise IP Telephony saw rapidly increasing sales as enterprises started to take VOIP seriously, especially call centers.
2. VA Linux
   Price Change: 183% Ticker:LNUX
   Comment:  Operator of  open source software portal "sourceforge.org"  and geek news site Slashdot.org saw shares rise as Sourceforge.net grew quickly and as it released an enterprise software version of sourceforge.org.  I will be moving this to the Internet sector for 2007 given that it is more much a content/e-commerce play now than it is a software company.
3. RSA Data Security
   Price Change: 149% Ticker: RSAS
   Comment: Early leader in hard tokens and public key encryption was bought by EMC this past summer for a nice premium.  May be first of several security acquisitions by EMC.
4. Smith Micro Software
   Price Change: 143% Ticker: SMSI
   Comment: Provider of a multitude of wireless software products and owner of the venerable Stuffit program, saw sales rise as carriers such as Verizon stuck deals for several of their software products.
5. Allscripts Healthcare Solutions
   Price Change: 101% Ticker: MDRX
   Comment: Strong demand their medical records management software thanks in part to government mandates helped propel this stock upward.
6. Quadramed
   Price Change: 92% Ticker: QD
   Comment: Another medical records software company.  I think I see a trend.
7. Acutate
   Price Change: 89% Ticker: ACTU
   Comment: Business intelligence vendor benefited from finally turning profitable and from it's emerging open source platform.
8. Mercury Interactive
   Price Change: 87% Ticker: MERQ
   Comment:  Application performance management vendor that  put enough of its accounting problems behind it to secure a sale to HP.
9. MRO Software
   Price Change: 83% Ticker: MROI
   Comment:  One of 3 public software companies that IBM bought in 2006.  Not sure how this fits into IBM's "we don't compete with our application partners" party line.
10. Mentor Graphics
    Price Change: 74% Ticker: MENT
    Comment: EDA tools vendor saw a nice rebound after a terrible 2005 as license sales picked back up.
    

The Storage Explosion

I am a big believer in the “scarcity and abundance” theory of IT development. The theory basically postulates that if you want to understand the near term future of information technology development the most important thing to consider is the scarcity and/or abundance of the “big 3” foundations of computing power: processing power, storage and bandwidth. Understanding the absolute and relative levels of these three technologies is the closest thing possible to having an IT industry crystal ball as they have a huge influence over everything from system architectures to capital investment plans to end user demand.

A 15 Year Rocket Ship Ride
It is with this in mind that I found a recent article on Tom’s Hardware to be fascinating. The article details the increases in storage capacity and performance over the last 15 years. Some of the numbers involved are mind boggling.  In the last 15 years, the storage capacity of top-end hard drives has increased 5,907X from 130MB in 1991 to 750GB in 2006. To put this in perspective, during the same time period here are some increases in the other core technologies of a “bleeding edge” PC:

                                       

End User Technology	1991	2006	X Increase
LAN Bandwidth	10 mbit/s (10BaseT)	1 gbit/s (1000BaseT)	102X
WAN Bandwidth	14.4 kbit/s (v.32bis)	3 mbit/s (Cable)	213X
CPU Performance	54 MIPS (486DX)	27079 MIPS (X6800)	501X
Hard Disk	130MB	750GB	5907X

The price difference is even more dramatic. In 1991 a megabyte of storage cost about $7.00, now it costs $0.000527. That’s a 13,274X price improvement or a 99.9925% price drop in 15 years. Not too shabby.

It’s interesting to note though that disk I/O performance improvement has lagged dramatically with only a 121X improvement from 0.7 MB/s to 85 MB/s. This clearly makes disk I/O one of the biggest, if not the biggest bottleneck in a modern PC. Put another way, it would theoretically take 3.1 minutes to write the entire contents of a 130MB  disk drive in 1991 while it takes about 2.5 hours to write the contents of a 750GB drive in 2006 (as anyone who has tried to back-up a monster like this well knows).

Forecast Calls For: More, Cheaper Storage
The near term prospects for additional gains in storage capacity remain promising. For traditional magnetic storage hard drives, the introduction of perpendicular recording should continue to drive platter densities higher, but much like CPUs, the limits of physics are starting to catch up with magnetic hard drives which suggests that they will not be able to continue their capacity gains indefinitely. Not to worry though, two new storage technologies are finally coming to market this year including Flash memory hard drives and holographic storage. Flash memory hard drives use NAND chips instead of magnetic platters to store data. They have a number of important advantages over traditional magnetic media including dramatically faster file access times and the ability to process far more I/O operations per second.  For example, SanDisk just announced today a 32GB flash drive that accesses files in 0.12 milliseconds vs. 8 milliseconds for the best magnetic drive, a 67X improvement (although its read rate is only 64 MB/s).  Flash drives also draw 50-70% less power than magnetic drives, weight about 50% less, do not produce noise or vibrations, give off very little heat, and are less fragile than magnetic drives. But all these improvements do not come cheaply as the initial 32GB flash drives will cost more than $20/GB or about 35-40X more than a magnetic drive.  Still you should expect to these as an option on high end ultra-portable laptops in a few months.  I also expect that many PC enthusiasts may buy a flash drive for their "C:" drive to dramatically improve Windows Vista boot times.

2007 will also see the first commercially available holographic storage drives, although these drives are likely to only compete with archival media, such as tape drives and Blu-Ray media, for the foreseeable future. Holographic areal storage densities have doubled in just the past year and at 515Gb/inch are already more than 2X those of the most advanced magnetic drives.  To put this in perspective, Sony’s Blu-Ray disks which have just started shipping after many delays have a 50GB capacity while InPhase’s initial holographic disk (which had it’s 1^st shipments just a few days ago) have a 300GB capacity and should go to 500GB in the next year or so. Put another way, you could store 106 DVDs on a single (slightly larger) holographic disk (although you can only write to these disks at about 23 MB/s, so be prepared to spend over 6 hours putting you DVD collection on a single holographic disk). Because it uses light rather than magnetic heads to access data, holographic storage should theoretically delivery better access times and faster read throughput than magnetic storage mediums. Holographic storage is expected to seriously challenge tape backup systems in the short term, but could also displace consumer storage mediums such as DVD and Blu-Ray as prices fall. Holographic disk drives are theoretically possible, but significant technical challenges still have to be overcome especially in terms of being able to rewrite the media and improve write speeds.

What Happens In A World Awash With Storage?
You may be asking yourself, this is all very interesting but why do you, someone who generally is focused on software and the internet, care so much about storage? I care because storage capacity is clearly the most abundant and faster growing component of the “big three”(processing power, bandwidth, and storage) today and it looks as though the relative disparity between the three may even increase further in the short term.  This situation should have some very interesting implications for both software and internet related businesses, some of which I will outline in my next post on the topic.

Virtual Stock Portfolio: March 2006

The Burnham's Beat Virtual Stock portfolio was up modestly in March.  The average pick in the portfolio was up 2.5% while the overall portfolio was up 1.7%.  This underperformed the NASDAQ though, which was up 2.6%.  This month's underperformance was almost entirely attributable to one stock, Bank Rate, which I will get to later.

For the 1st Quarter overall, the portfolio was up 13.8%  which is well ahead of the average quarterly return since inception of 8.9%.  This also compares favorably to the NASDAQ's 6.1% quarterly gain.  Short positions were flat (+0.0%)in the quarter and all the gains were generated by long positions.  Overall this quarter went very well with 8 out of the 11 positions profitable.  It would have been even better had I not pulled the trigger too early on a couple of short picks (CNVR, RATE).

As it happens, this will be the last month I post the Burnham's Beat Virtual Stock Portfolio.   It's been a lot of fun publicly picking stocks again and letting the chips fall where they may at the end of each month.  I'd love to keep doing it but I have to stop publishing this kind of stuff for some professional reasons.

For the record, the virtual portfolio makes its final close up 109.3% from the day I started it (1/26/04).  That compares the NASDAQ's 8.6% gain during the same period.   This equates to annualized return of 36% despite the fact that the portfolio's average market exposure was just 3.8%.  Of course, this was a "virutal" portfolio on a blog so it doesn't count, but it was fun to test myself against the market again.  For those that have followed my ups and downs, thanks for all your comments and criticisms.

Long Picks

 

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +94%,  Mar. vs. Feb.: +14.8%
Comments: Great month which means it is finally trading back in range with the rest of BI players.  It may have a bit more room to grow here because the street estimates remain too low, but most of the easy money is out of this stock now and it's probably a good time to move on.  This stock is a good case study on how post-SARBOX accounting problems can cloud the street's judgement for companies with good products in strong markets.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Actuate is a business intelligence company with a particular focus on enterprise reporting.  I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +68.0%  Mar. vs. Feb.: +9.5%
Comments: Another strong month and with the stock trading at 19X 06, still some more room to grow.  I think the street is wrong on both top and bottom lines due to an acquisition at the beginning of the year.  We will see!

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +17.5%  Mar. vs. Feb.: -6.1%
Comments: Only long postion to lose money this month which concerns me.  I also don't like the deferred revenue trend in the business.  This is probably the weakest long in the portfolio right now in terms of Q1 exposure.

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: +47.0%  Mar. vs. Feb.: +2.2%
Comments: Trading in line with the other online gambling comps now.  A competitor, Playtech, went public this month and its growth rates may make Cryptologic look relatively unattractive.   Playtech may be the better way to play this trend as it is cheaper on a PEG basis.

Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well.  Some may recall that I had PRTY long in a successful pair trade in Q4 05.  After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet.  Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base.  By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses.  Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: -2.1%  Mar. vs. Feb.: 2.8%
Comments: Concerns about online gambling legislation continue to buffet the biggest online gambling stock.  2.5% dividend payment in May makes this easier to hold on to.

Company: Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception. However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow.  It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: +18.7%  Mar. vs. Feb.: +9.9%
Comments: M&A speculation in the supply chain/PLM market is starting to heat up after Matrix One 's purchase and Agile is the primary beneficiary of this speculation.

Short Picks

Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: +34.1%  Mar. vs. Feb.: +7.6%
Comments: While it was a good month I remain amazed the stock is not down more.  Delisting should be confirmed in April but appeals will likely push that off for at least a month or so. My guess is that they will reverse spilt the stock to stave off delisting but you never know.  Another financing needs to take place sometime by end of May, so it looks like a no-brainer to hold this for at least a couple more months.

Company: Convera  Ticker:   CNVR
Sub-sector: Content Management
Investment Thesis: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product.  That turned out to be a bad short as the hype around search was just too big of a reality distortion field.  Well, reality has begun to settle in and I am back for another beating.
Performance: Since 1/31/06: -22.0% Mar. vs. Feb.: 2.2%
Comments: After a disasterous first month in the portfolio, CNVR seems to have settled down a bit but it remains a very jumpy stock.  There may be more PR-driven pain in the coming months but it's inevitable at some point that people will realize it's crazy to pay a 66% premium to Google and a 233% premium to an already inflated Autonomy on a price to sales basis for a company with  0.2% the revenues of Google.

Company: BankRate  Ticker:  RATE
Sub-sector: Internet Content
Investment Thesis: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyzing financial services related internet companies.  Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees.  With interest rates rising, I don't think they will have trouble hitting their Q4 #s, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
Performance: Since 1/31/06: -14.6% Mar. vs. Feb.: -20.5%
Comments: Ug.  After a decent first month this stock killed me this month, despite announcing a big secondary offering of shares.  It would be funny to watch all the retail investors piling in while the insiders bail out except for the fact that this one stock killed my overall performance.  I was obviously way too early on this and need to cover and wait for long term rates to really start to put the squeeze on.  I can't see that happening this quarter and don't want to stick around for the report.

Software Stocks Update: March 2006

Software Stocks modestly outperformed the rest of the market in February with the Software Stock Index up 3.3% vs. the NASDAQ's 2.6% gain. The strength was largely due to strong performances from several large cap stocks, especially Oracle (+10.1%) and SAP(+6.9%).  The average stock was up 4.5% thanks to even stronger small call performance.  The best performing sector was Wireless (+12.3%) due to strength at Openwave and Inforspace while the worst performing sector was, one again, Clinical Apps (-4.6%).

There were, yet again, no software IPOs this month.  In fact there were no Software IPO's in the 1st quarter. The two M&A transactions this month were both private buyouts with Silver Lake buying Serena Software and Golden Gate buying business intelligence player GEAC.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.

Virtual Stock Portfolio: February 2006

After a very strong January, the Burnham's Beat Virtual Stock portfolio was down slightly in February.  The average pick in the portfolio was down 0.1% while the overall portfolio off 0.7%.  This still outperformed the NASDAQ, which was off 1.1%, but was no where close to last month's 12.8% gain.  This month's slight loss was almost entirely attributable to one stock, Convera, which is kind of frustrating because just about every company, including Convera, performed as expected at a fundamental level.

I am only making one change this month.  I am covering my short on Entrust as it is pretty much played out at this point.  This will leave pretty concentrated on the short side but I should have a few new picks next month.

Long Picks

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +68.9%,  Feb vs. Jan.: -4.6%
Comments: Traded off a bit this month after a very strong January and a slight miss on its Q4 report.  Street numbers are still too low for this stock though and it has a decent product cycle coming up so I will continue to hold tight, but the stock is starting to approach the valuation levels of the other major players in the BI space.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Actuate is a business intelligence company with a particular focus on enterprise reporting.  I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +53.4%  Feb. vs. Jan.: -4.0%
Comments: Traded off in February after a blistering January.  Stock still has some life left because the street numbers are too low given a recent acquisition the company made.

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +25.2%  Feb. vs. Jan.: +5.6%
Comments: Nice month thanks to a decent Q4 report.  The stock still trades at a big discount relative to the other content management names so there should be some upside remaining.  Short interest is really starting to perk up on this stock though so I am watching it carefully. 

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: +43.8%  Feb. vs. Jan.: +9.3%
Comments: A good Q4 report drove further gains in the stock.  Now trading roughly in-line with the rest of the online gambling comps (around 12X 06 EPS).  IPO of a competitor later this month may create a nice valuation gap though.

Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well.  Some may recall that I had PRTY long in a successful pair trade in Q4 05.  After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet.  Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base.  By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses.  Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: -4.7%  Feb. vs. Jan.: -4.7%
Comments: Not a great first month in the portfolio, as concerns about online gambling legislation combined with a CEO change depressed the stock.  Still looks like a good buy though given the continued momentum in the sector and their leadership.

Company: Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception. However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow.  It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: +7.9%  Feb. vs. Jan.: +7.9%
Comments: Good first month in the portfolio thanks to a better than expected Q4 report.  Supply Chain/PLM may indeed be coming back to life.

Short Picks

Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: +28.7%  Feb. vs. Jan.: +1.7%
Comments: As regular as clockwork, they dumped another 8.4M shares in mid-February to finance their slow sail into oblivion.  It is stunning indictment of the SEC and NASDAQ that a company like this can continually sell fully registered common shares with no lock-up at huge discounts  (24% discount to market and 19% at the money warrant coverage!) with no one taking legal or regulatory action.  They are lucky they have no institutional holders because they'd sue to force a rights offering in a heartbeat.  Instead, you have a cult-like group of retail investors who lap up the excess shares in the open market while a bunch of bucket-shop hedge funds laugh all the way to bank.  Amazing.  However, with 100M shares outstanding the scam is undoutedly getting a bit more difficult to pull off though.  Delisting is scheduled for April (although it will undoubtedly be appealed), so I see no reason not to hold this position to its logical conclusion.

Company: Entrust  Ticker:  ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products.  I know them from my days covering the security sector on Wall Street.  They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again.  It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +33.9% Feb. vs. Jan.: +8.2%
Comments:  It's hard to part ways with this stock, but with a 34% gain, likely support from continued buybacks and a much more realistic (but still too generous) 17X PE it's time to cover and move on.  Thanks for the memories.

Company: Convera  Ticker:   CNVR
Sub-sector: Content Management
Investment Thesis: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product.  That turned out to be a bad short as the hype around search was just too big of a reality distortion field.  Well, reality has begun to settle in and I am back for another beating.
Performance: Since 1/31/06: -24.8% Jan. Vs. Dec.: -24.8%
Comments: Last month I said I was late to the party on this stock.  Boy was I ever.  Without CNVR, the overall portfolio would have been up 2% for the month.  The crazy thing about this stock is that they pre-announced Q4 revenues would be down close to 50% y/y early in the month and the stock barely budged.  When I saw that I got a sinking feeling in my stomach because it meant there were no sellers left at all.  Sure enough, a few days later they put out a press release announcing 3 beta customers for their new web search product and the stock gapped up 30%.  They also annouced a new $38M private placement which should come in handy given their prodigous burn rate.  How can a company with $3M/quarter in revenues, a management team that has led it down successive dead ends, and $5M/quarter burn rate be worth $490M+?  I don't know, but it is and it's kicking my ass for a second time.

Company: BankRate  Ticker:  RATE
Sub-sector: Internet Content
Investment Thesis: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyzing financial services related internet companies.  Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees.  With interest rates rising, I don't think they will have trouble hitting their Q4 #s, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
Performance: Since 1/31/06: +4.9% Feb. vs. Jan.: +4.9%
Comments: Good first month which pretty much went as expected in that the stock seems to be trading in line with mortgage/housing sentiment which I expect to get worse over the next couple of months.

Software Stock Update: February 2006

Software Stocks underperformed the rest of the market in February with the Software Stock Index down 2.4% vs. the NASDAQ's 1.1% decline.  The average stock was up 1.2% thanks to a few crazy microcaps, but overall there were declines in small, mid, and large cap stocks.  The best performing sector was Collaboration (+11.3%) while the worst performing sector was Clinical Apps (-9.6%).

There were, yet again, no software IPOs this month but two more software acquisitions were closed with Intellisync going to Nokia, Micromuse going to IBM.  We're just 2 months into 2006 and already 7 firms or 2.7% of the total have been acquired.

For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.

Virtual Stock Portfolio: January 2006

January marks the 2 year anniversary of the Burnham's Beat Virtual Stock Portfolio and as it happens the portfolio closed out it's second full year on a high note, generating its second best monthly return ever at 12.8%.  Over the last 24 months the portfolio has had 27 different positions and is now up a total of 107% with the average pick up 28.7%.  The key to generating the returns has not only been stocking picking but keeping the portfolio roughly 50/50 in terms of long and short exposure as this has allowed it generate positive returns in good and bad markets with lower overall risk.

January was an exceptional month, so it will be a tough act to follow.  Both long and short positions made money which means it was a good stock picking month.  I am going to add a few new positions this month to try and spread out the portfolio a bit more and make the short side a little bit more "jumpy" given that February tends to be a very tough month for stocks.

Long Picks

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +77.1%,  Jan. vs. Dec.: 16.3%
Comments: Another nice month which can't be good news for the shorts in this stock.  They reported on the last day of the month and missed their EPS a bit due to weak license sales, but not enough to cause serious damage.  A new release of their flagship product should be good news for license sales this quarter and with $100M in cash flow they will probably start buying stock back again in a few months as well.  Given this, I can't see why I won't hold this through the end of this quarter especially given that the shorts are going to continue to suffer.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Acutate is a business intelligence company with a particular focus on enterprise reporting.  I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +59.7%  Jan. vs. Dec.: 28.7%
Comments: This stock was "en fuego" in December as folks bid it up in anticipation of a good Q4.  The company reported on the last day of the quarter and did in fact beat top and bottom, but people didn't like it's guidance for 06 and it traded off 7% or so.  I am still going to hold here for a bit as there seem to be some big buyers and with the stock trading in the mid-teens PE vs. mid 20's for the comps there is still some significant upside room.

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +18.5%  Jan. vs. Dec.: 17.4%
Comments: Had a strong January after a weak December (perhaps driven by tax loss selling).  Looks like people think it will have a good report.  Still trading at a healthy discount to the rest of the content management group which has been on a tear lately.
 

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: 31.6%  Jan vs. Dec.: 18.0%
Comments: Nice month that eliminated some of the discount between CRYP and the rest of the online gambling sector, but still some room for improvement.

Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well.  Some may recall that I had PRTY long in a successful pair trade in Q4.  After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet.  Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base.  By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses.  Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: 0%  Jan. vs. Dec.: NA
Comments: You could probably pair this up against SBT again (SBT is going to look very pricey once people figure in all the shares they are issuing), but I figure that PRTY is compelling enough by itself.  This is a volatile stock, but the valuation is just compelling, especially relative to the land-based casinos.

Company: Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception.  However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow.  It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: 0%  Jan. vs. Dec.: NA
Comments: The stock is about 35% off it's low so I am a little late to the party, but I think supply chain will see some renewed investor interest this year.

Short Picks

Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: +27.5%  Jan vs. Dec.: 2.9%
Comments: Relatively quite month.  They will need to raise more money by end of the quarter and it's hard to imagine that they can offer a bigger discount than they did last time.  They may have decent Dell-related revenues this report which might spike the stock, but I will try to have patience.

Company: Citadel Security Software Ticker: CDSS
Sub-sector: Security
Investment Thesis: Citadel offers a subscription service to help companies spot security vulnerabilities.  It's a good idea, but a lot of other companies including a number of private companies offer the same service.  Lately Citadel's business has been falling off a cliff.  They are buring cash to the tune of $5M/quarter and yet the management team hasn't done any major cost cutting.  As a VC, I can tell you first hand that it is incredibly difficult to turn around this kind of situation even if you get some product momentum.  I haven't seen a single company in this kind of shape pull it out.
Performance: Since 9/30/05: 49.9%    Jan. vs. Dec: 3.1%
Comments: I am covering this position this month.  There's still a good chance the company is sold at a price below the preferred prefs and debt (thus wiping out what's left of the equity), but I've made a good return and it's important not to be too greedy.  In addition, the CEO has guaranteed the company's debt which shows some real conviction and the company continues to land large contracts which means that there is clearly something of value there that will sell for something.  I have no idea how they are paying the bills though...

Company: Entrust  Ticker:  ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products.  I know them from my days covering the security sector on Wall Street.  They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again.  It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +28% Jan. Vs. Dec.: +16.7%
Comments:  Like old reliable, Entrust disappointed again and the stock traded off nicely.  They actually hit their Q4 numbers but guided down for the year and people came to their senses and asked "why I am paying close to 30X for this stock again?".  I will keep it in the portfolio this month as February is usually choppy but I am worried that the management team may support the stock by continuing to their ill-advised buy backs.

Company: Convera  Ticker:   CNVR
Sub-sector: Content Management
Investment Thesis: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product.  That turned out to be a bad short as the hype around search was just too big of a reality distortion field.  Well, reality has begun to settle in and I am back for another beating.
Performance: Since 1/31/06: NA Jan. Vs. Dec.: NA
Comments:  I am, admittedly, late to the party on this one give that it has traded off 40%+ in the last two months.  Despite the decline, the stock is still trading at a crazy 19X EV/Sales despite zero traction for the new product and a substantial negative cash flow.  I will have to be careful given the hype, but this should be trading lower six months from now.  I am a glutton for punishment.

Company: BankRate  Ticker:  RATE
Sub-sector: Internet Content
Investment Thesis: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyze financial services related internet companies.  Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees.  With interest rates rising, I don't think they will have trouble hitting their Q4 #w, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
Performance: Since 1/31/06: NA Jan. Vs. Dec.: NA
Comments:  Close to it's 52 week high and not the kind of chart you like to bet against, but the mortgage industry is highly cyclical and can change on a dime.  I am bearish on long term rates/housing, so this is a good Internet related play on those themes.  Also, pay-per-click searching is undermining some of the growth in the referral market.  There are some other potentially good mortgage-related Internet shorts (NTBK, HOMS), but this is the most attractively priced.

Top 5 Most Shorted Software Stocks

Following up on a quick post I did on the Top 5 Internet Stock Short Positions at the end of 2005, I thought I would do the same analysis for the Software Sector.  It's interesting to note that most of the shorts are mid/small cap stocks even though large cap software stocks were some of the biggest losers last year.

To figure out just how short a stock is, I am taking the reported number of shares sold short as of mid-December and dividing it by the float (which is basically total shares out less insider shares).  Here are the Top 5 Software Shorts as of the end of 2005:

1. Clickcommerce    Ticker: CLCK
   % of Float Short: 41.4% 
   P/E: 16.2  Market Cap/Tangible Book: 31.0
   Comment: Kind of strange to see this stock so short given its low P/E, but apparently the pros think the earnings are bogus and a day of reckoning is coming.  Better come soon though as the stock was up 30%+ last year.
2. Rightnow   Ticker: RNOW
   % of Float Short: 29.6%
   P/E: 103  Market Cap/Tangible Book: 15.3
   Comment: One of the few public SaaS stocks and one that has a large % of the stock still owned by insiders.  Looks like some pros don't buy the SaaS hype as the short position on this stock more than tripled last year.  I met the CEO and he doesn't seem like the type of guy to sell, so insider selling is not going to bail out the shorts here, it's going to have to be poor performance.
3. TakeTwo Interactive    Ticker: TTWO
   % of Float Short: 21.6%
   PE: 31.6  Market Cap/Tangible Book: 3.3
   Comment: Maker of Grand Theft Auto series guilty of stealing from it's shareholders in the form of a 49% decline in it's stock price in 05. Pros apparently think the worst is yet to come as there are still over 15M shares short.
4. Microstrategy    Ticker: MSTR
   % of Float Short: 21.5%
   PE: 20.5   Market Cap/Tangible Book: 7.4
   Comment: A long time short favorite thanks to numerous run-ins with the SEC. Pros obviously think "once a crook, always a crook".  I am actually long this stock which means I am pretty stupid and/or very forgiving, we will see!
5. Convera   Ticker: CNVR
   % of Float Short: 20.4%
   PE: NA  Market Cap/Tangible Book: 10.2
   Comment: Enterprise search vendor that has shrewdly surfed the Google hype by announcing a series of web-based search initiatives.  My pick for "most likely to screw the pooch" in 2006.

Virtual Stock Portfolio: Year End 2005 Review

The Burnham's Beat virtual stock portfolio closed out 2005 on a strong note up 4.6% in December vs the Nasdaq's 1.2% decline. Q4 turned out to be a great quarter after I spent some quality time in late September updating what had become an admittedly dated portfolio. Its 16.5% return was the second best quarterly return since inception.  Overall, 2005 was another good year for the portfolio as it was up a total of 37.1% vs. the Nasdaq's 1.4% gain.  This brings the total gain since the portfolio's inception in Freburary of 2004 to 84.0% vs. a 2.4% gain for the NASDAQ over the same period.

I only held one position the entire year and that was a short position in Wave Systems (+38% return on the year).  Other than that the entire portfolio turned over during the year.  My biggest gainers in 2005 were Neteller (Long, +116%), SportingBet (Long, +56%). SPSS (+53.5%) and  Microstrategy (Long, +52%).  My biggest losers were Autonomy (Short, -109%), Salesforce.com (Short, -39%), FireOne (Long, -13%) and my first trade in Actuate (Long, -5.9%).  Overall, 74% of my positions were positive which is pretty respectable.  I did end up shorting two of the year's best performing software stocks (Autonomy and Salesforce.com) but at least I limited my losses by selling out before they really hit their strides.

Repeating 2005's performance will be pretty difficult in 2006, but if the market stays choppy it should be continue to be a good environment for picking stocks.  To start off the year I am getting out of a few positions that seem to have run their course.  The first is the paired trade between Party Gaming (long) and SportingBet (short), by the end of 2005 the multiples of these two stocks had basically converged so its time to unwind this trade and move on.  I am also getting out of my short position in Emerge Interactive.  The company seems to have stablized a bit and I don't want to be too greedy as they have plenty of cash left.  I am also exiting FireOne group, one of the online gambling payment processors.  I just can't justify holding this stock when it trades at a premium the #1 player in the space (Neteller) despite lower margins and growth rates.

I am not replacing these positions this month, but will add a few more positions next month after the market settles down for the year.

Long Picks

Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy.  This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions.  Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +52.3%,  Dec. vs. Nov.: 11.9%
Comments: Nice month and still chugging along despite a big short position.  I am bit concerned that the stock will start to sputter now that they are tapped out from a buyback perspective, but they should report a decent Q4 and the stock will soon start to trade off of 2006 which reflects all the buybacks.

Company: FireOne Group Ticker: FPA.L
Sub-sector: Financial Services
Investment Thesis: FireOne operates an Internet payment service very similar to Neteller. It is used primarily by on-line gamblers to transfer money around.  I I added FireOne to the portfolio because I wanted to maintain overweight exposure to the these kind of Internet payments plays without putting all my eggs in one basket (Neteller). Now that I have closed out Neteller this will be sole exposure to Internet payments.
Performance: Since 7/31/05: -13.3%,  Dec. vs Nov.: -0.1%
Comments: Closing this position out after the market has moved to such an extent that Neteller (the #1 player in the market and an old long pick) now trades at a discount to Fireone despite the fact that FireOne has lower margins and growth rates.  If I were going to own any stock in this space now it would Neteller not this one.

Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Acutate is a business intelligence company with a particular focus on enterprise reporting.  I had a long postion in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus.   ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +24.1%  Dec. vs. Nov.: -4.8%
Comments: Cooled off a bit in December, after busting through $3/share without a problem.  If they exceed estimates this quarter it could move past $3.50.

Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004.  The stock suffered from all the M&A related charges and fallout but managment now claims that they are going to resolutely focus on EPS growth.  OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio.  Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +0.9 % Dec. vs. Nov.: -5.6%
Comments: Weak in December, should recover in January (if it doesn't preannounce!).

Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms.  They license their software to numerous companies in return for a cut of the take.  About 70% of their revenues are from casino related software sales and about 30% from poker related sales.  Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: 11.6%  Dec. vs. Nov.: -2.5%
Comments: I have been following the online gambling sector closely for the past two years and right now I really think that CRYP offers the best risk/reward of any of the stocks.  It trades at the lowest EPS multiple in the group right now (14X 2005) which is about a 30% discount to where the rest of the group now trades.  This despite the fact that CRYP is one of the only online gambling stocks to trade on a US Exchange and has a very diversified revenue base.  This should be trading at least 25% higher.

Pair Trades
Long: Party Gaming Ticker: PRTY.L
Short: SportingBet Ticker: SBT.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with an exclusive focus on poker.  Party went public this summer at 116p and got up to 140p before getting creamed when it talked down its revenue growth prospects on its 1st earnings call.  The stock is now below its IPO issue price and at this level it is not only at 12X earnings, but 12.4X cashflow (of $500M/year) for a cash flow yield of over 8%.  In comparison to Party, SportingBet is tra