What:

I am initiating the first (1) BUY recommendation of SoundBite Communications, Inc. (Nasdaq: SDBT) at or around $6.00 per share.

Normally I would wait until I have finished my full research report before sending out a formal recommendation of a company that I have been following and intended to recommend, but the current share price and valuation and the company’s strong niche and leadership within their field, lead me to make this recommendation now.

Why:

Let’s start with a very brief description of the company and what they do.

SoundBite Communications is a leading provider of on-demand automated voice messaging (AVM) solutions that are delivered through a Software as a Service (SaaS) model.

Using a web browser, clients can easily create and manage the delivery of automated, interactive voice messages to their customers. SoundBite makes creating and managing outbound, inbound, and blended customer communications campaigns easy, fast, and effective.

SoundBite capabilities go beyond those of “voice blasters” and enterprise predictive dialer systems. Their automated voice messaging solutions feature multi-pass campaigns, call escalation strategies, unparalleled answering machine detection, seamless text-to-speech, advanced personalization, enterprise-level campaign management, dynamic call pacing, and much more.

More than 200 organizations rely on SoundBite to initiate and manage customer contact campaigns across a variety of collections, customer care, and marketing processes.

When you get a phone call from a AVM system to alert you of a past due bill, to welcome you to a service, to confirm delivery, or to receive payment from you over the phone, SoundBite Communications can handle all the infrastructure, dialing, analytics, etc., all on-demand over the Internet, so company’s don’t have to purchase equipment, software or spend any money at all on start-up costs.

This allows SoundBite to run a tight ship, keep costs low, and margins high.

Here’s an example of what SoundBite can do for a company:

http://www.soundbite.com/files/76

Huge Market Opportunity

You may have gotten a call previously from what is called a Predictive Dialer.

This is when you say: “hello…” and there is a long pause, before someone comes on the line, and mispronounces your name before making some offer or otherwise bugging you.

SoundBite does away with this because their system uses proprietary mechanisms that allow for almost instantaneous contact to the customer, thus allowing for more 1st person calls, that end in a higher conversion for the company using their software.

In addition, SoundBite’s answering machine detecting algorithms are almost 98% effective, allowing more clients to actually reach real people, or, if they intend to leave a message, leave one explicitly after the machine has picked up, cutting down on costly messages that are cut-off or otherwise don’t reach the intended recipient.

The market opportunity for this technology is huge!

According to estimates, the market for AVM solutions will increase from $370 million in 2005, to $1.4 billion in 2010, representing a compounded annual growth rate of 30.5%!

SoundBite is a dominant player in their field, with a large client base that includes 14 of the 20 largest debt collection agencies, as well as newer companies that have discovered the possible uses of their software such as T-Mobile, which found that not only did they save bucket-loads of money using SoundBite’s technology, BUT more importantly for them, customers loved the service because it saved them the embarrassment of being harassed or having to deal with a live agent telling them that they forgot to pay their bills!

Oh, and for those wondering how a potential downturn in the economy might affect SoundBite, don’t worry. That’s actually when SoundBite’s business actually picks up! Since the majority of their income is derived from the collections industry, when things are tough, that’s when these businesses are spurred into action, and SoundBite benefits as a result.

The possibilities for expansion into other industries are endless.

The Valuation

Not only do I love what SoundBite does, but I also love that there is no other public company that competes directly with them.

In addition, their valuation metrics are extremely juicy right now, thus why I had to put out this buy recommendation before I was totally finished with my research report.

My findings indicate that SoundBite should be no less than at least DOUBLE where it sits today!

Soundbite just had their IPO about 2 months or so ago, and came public at $8.00 per share! They were originally going to come public at $12-13 per share, before they ran into a bogus patent infringement allegation on the eve of their IPO! The suit has since been dropped, but potential investors were scared off nonetheless and SoundBite had to lower their IPO price, and it sits even lower today!

Several valuation metrics also lead me to this conclusion including:

- Discounted Cash Flow Analysis (DCF): SoundBite should be at least DOUBLE where they sit today no matter how dire I make the assumptions.

- Price-to-Sales (P/S): Using standard industry comps, SoundBite is WAY undervalued even on a pure sales basis. For instance, SoundBite is more of a SaaS company, since all their business is done on the Internet, therefore, they should be valued as other SaaS companies are valued such as Salesforce.com (NYSE: CRM), Constant Contact (Nasdaq: CTCT), among others, who sport P/S ratios that are 4-5 times HIGHER than SoundBite!

- Enterprise Value to Sales (EV/S): Again, as above, SoundBite is trading at a steep discount to its peers. With over $30 million in cash and NO debt, SoundBite’s enterprise value sits at just $57 million, while their sales will be about $40 million this year! That’s absolutely ridiculous!

- Other metrics: Price to Earnings (P/E), Price to Earnings to Growth (PEG), etc., all show that SoundBite is not only a great company with increasing profitability and revenues, but way undervalued.

It doesn’t take long to see we are getting a true diamond in the rough.

Bottom Line

While I am still putting together the final research report, I thought it would be an absolute crime to let SoundBite’s shares go this cheap without at least an initial recommendation.

Because their float is small, and the company has very low volume, not many people on Wall Street follow this stock or this company, but that will certainly change very soon.

In the coming weeks I will publish my full analysis and research report on SoundBite, but in the mean time, with all the work that I have done on this company, where the shares sit today is absolutely a rock-bottom bargain price for a company with accelerating growth, high margins because of their SaaS business model, and a company on the verge of turning free cash flow positive this year.

It all adds up to a perfect little company and the type that I specifically look for to give us a huge edge over the rest of the market.

Start your position today!

SoundBite trades with very high bid/ask spreads. Learn how to protect yourself from getting screwed by the market makers.

Variables You Should Know:
Risk Rating:	7 (Moderate)
Position Size:	1/4 (1-28-08)
Buy Around Price:	$6.00 (1-28-08)