SoundBite Communications (Nasdaq: SDBT), a leading provider of on-demand customer contact solutions, reported its fiscal 1st quarter 2008 earnings on Wednesday May 7th after the market closed, and to say they were bad would probably not serve the word “bad” properly.

Not only did SoundBite miss their own guidance and estimates for the first quarter, but they also LOWERED guidance for Q2/2008, AND full-year 2008, only 3 months after they had raised that same guidance.

So is it time to sell SoundBite and cut our losses? Maybe…

What follows is a brief summary of SoundBite’s earnings announcement and conference call, with my solemn thoughts at the end.

Look for a full report on their latest quarter and analyst conference call highlights in a few weeks after they release their latest 10-Q filing and I have a chance to parse the data fully.

New to the SoundBite story?

• Read my last company update and buy recommendation here.

or you can:

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Sales, Earnings, Margins: All DOWN!
• Other Business Highlights: Lowers Guidance, Free Cash Flow Positive
• Conference Call Highlights: Patent Litigation Update, Management “Excited”
• Bottom Line: This one certainly came out of left field…

Hit Me With Some Numbers

Lower Guidance Already?

Here are some of SoundBite’s earnings lowlights (growth from previous year’s 1Q/analyst’s estimates where applicable):

• Quarterly sales of $10.6 million (up 21% from prior year/vs. $10.86 million projected)
• GAAP quarterly loss of (-$1.5 million), or a loss of (-$0.10) per diluted share (down from a (-$.86 million), or (-$1.37) per diluted share, loss in the prior year)
• Non-GAAP quarterly income of (-$636,000) (down from a (-$31,000) loss in the prior year)
• Non-GAAP loss of (-$0.04) earnings per share (up from a (-$.05) loss in the prior year/ vs. $.00 projected)
• Gross margin shrunk to 61.7% (down from 63.9% from prior year, and 66.6% last quarter)

My Take: Yuck…I couldn’t even try to dress these numbers up if I wanted to. I guess the only good news is that sales actually did grow 21%, but does it really matter when losses grew even faster?

In addition, SoundBite is facing more intense competition, and it’s showing up in their lowered margins. They are having to lower their prices to be competitive with the other players in their space, more so than they expected.

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Other Business Highlights (Lowlights)

Lowers Guidance, Free Cash Flow Improves

• For the second quarter of 2008, SoundBite currently projects GAAP revenues in the range of $11.2 million to $11.8 million and gross margin in the range of 61% to 63%. This compares to analysts expectations of $12.33 million (about a 6.7% decline taking the midline).
• For the second quarter of 2008, the projection for Non-GAAP operating loss is in the range of $400,000 to $900,000.
• For the full year 2008, SoundBite lowered their GAAP revenues to a range of $47.0 million to $49.0 million from the previous range of $53.3 million to $55.3 million, and analysts expectations of $53.47 million (about a 10% decline!)
• For all of 2008, SoundBite projects GAAP gross margin percentage to be in the range of 61.0%-64.0%, from a previous range of 62%-65%.
• For all of 2008, SoundBite is estimating a non-GAAP operating loss of $100,000 to $1.6 million.
• In Q1 SoundBite had 184 active clients, an increase of 10% vs. 167 in the prior quarter.
• Existing clients accounted for 99% of total revenue, while new clients accounted for 1%.
• Top 20 clients accounted for 78% of total revenues.
• Cash flow for Q1 was $1.5 million
• CAPEX: $631,000
• FCF: $869,000 (First Free cash flow positive quarter!)

My Take: Well SoundBite WAS cash flow positive this quarter and free cash flow positive for the first time ever as a public company…that has to count for something right?

Don’t bet on it!

This is obviously not what I expected or could foresee coming! Especially in light of last quarter’s beat and raise earnings announcement where everything in the business seemed to be humming along quite nicely…

There’s nothing I can say except I was flat our wrong on this one.

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Conference Call Highlights

URS Patent Litigation Continues, Despite Crappiness, Management Still “Excited”

The following are the highlights from SoundBite’s analyst conference call:

• URS Patent Litigation Update: There seems to be 2 separate items with regards to the URS patent litigation claims. Management wasn’t entirely clear on the call, but I believe it breaks down thusly:

Part 1: First off, SoundBite believes they are still on track for a May expedited trial date for the previously mentioned URS case where SoundBite sued URS for tortious interference during their IPO, and they believe they will be successful in this suit. They have completed the discovery process with a number of depositions being taken and they are merely waiting for a trial date, which they believe will take place this month.

Part 2: In addition to this first suit, it seems that SoundBite is now a part of another suit AGAINST them on the part of URS.

According to management on the conference call, on May 1st, 2008, URS filed a complaint in federal court in Minnesota, looking to retract its statement of non-liability, from the aforementioned case.

In the new complaint, URS asserts a claim for material misrepresentation, alleging that it filed the original statement of non-liability after relying on what it characterizes as “false representations” from SoundBite concerning its non-infringement of URS’s issued patents.

URS has also asserted a claim that SoundBite’s on demand AVM products infringe on one of URS’s existing patents. SoundBite’s response to URS’s claim is due on June 25th, 2008.

This appears to be a separate claim than the one that they are going to trial on in May.

My Take: Yet another wrinkle in the SoundBite vs. URS matter. I am going to have to talk to management to clarify this exactly, and make sure that I got my story straight, but I believe these are 2 separate lawsuits, one brought about by SoundBite against URS for interfering with their IPO, and one brought about by URS against SoundBite withdrawing their original non-infringement claim that took SoundBite off the hook in the original suit.

Confused yet? I’ll make sure to get to the bottom of this.

• Patent Infringement Suit Cost: The above guidance does not include approximately $1.7 million in legal expenses for the URS patent litigation suit, that is expected to total about $2.5 million by the end of the year.

• Overall Economy’s Affect on Business: During the 1st quarter, SoundBite had a number of collections clients utilize their service less than was originally anticipated, and they believe that some of this is the result of the sub-prime mess that is affecting many markets, and decreased usage as a result.

The CEO further stated that because of the current credit climate, collections agencies are having a harder time collecting debt, and therefore, are taking a more conservative approach to using SoundBite’s services.

He reiterated that their business typically has some seasonality built in. The first quarter is typically lower in sales on a sequential basis from the 4th quarter of the preceding year, and then sales rise in each subsequent quarter, and they expect this year to be no different.

When talking to an analyst, the CEO explained that they never said their business was countercyclical, but the CEO explained that because people are losing their jobs, houses, etc., they are unable to pay anything, and that includes debt, so debt collection agencies are scaling back their usage of SoundBite as a result…

My Take: I am mystified by these comments!

I want to make sure I got this right: SoundBite is a countercyclical company (at least that’s what we were led to believe when first investing in the company), BUT not if the economy goes down too much, then its just like every other business? I am not too happy about this change in tune at all.

• First and Third Party Collections: When asked about the relationship of the 1st party (companies that use SoundBite to collect their own debt, retain customers, etc.) to 3rd party (companies that use SoundBite ON BEHALF of other companies) and why their revenue fell short, the CEO stated that what they are seeing and didn’t anticipate was that the 1st party guys are taking longer to test and evaluate their campaigns before deciding to ramp up and spend more on them.

He said that they seem to be more cautious and it takes a month or more to get the data back and analyze it and then move on it.

Furthermore, when the analyst asked if they had seen some of these 1st party customers pull back or back out of their testing and contracts, the CEO said no, that none of them have done so, which is why they are so bullish on the continued growth for them (SoundBite) and the sector, but that they cannot predict with certainty when these accounts will convert.

The CEO then kept stating how “excited” they are about their future growth prospects, and gave various “examples”.

My Take: Huh? So you are excited because it looks like more and more 1st party clients are signing up to use your stuff, but as of yet, they are slow to commit and use SoundBite’s offerings, but nonetheless, the CEO is EXCITED about their future prospects?

Oh, and I might want to remind everyone, that SoundBite did just LOWER 2nd quarter guidance and full-year guidance pretty substantially….but overall, I’m really excited too!

• The CEO on Forward Guidance: Moving forward SoundBite believes it prudent to lower their guidance in light of the abovementioned factors for the following reasons:

1. The current economic climate and softness in the collections industry are likely to continue through year’s end
2. Second, they are seeing pricing pressure from competitors using both hosted and on-premise solutions
3. Third, because in the last year they have focused their products and marketing on 1st party clients

While the resulting revenue stream is greater in this segment, ramping up sales and securing contracts are more difficult to predict, and garner.

Further, the CEO noted that in these times, companies are laying off employees and reengineering their processes rather than focusing on new initiatives like SoundBite’s services, even though in theory, they fully understand the potential cost savings and benefits to their organization.

My Take: While any lowered guidance is never good, some are better than others. This was not the good kind, and the reasoning behind the lowering of the guidance makes sense, but I still think that SoundBite should have seen this coming.

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Bottom Line

SoundBite is on Notice!

I’ve been pounding the table so hard, and for so long for SoundBite, that my hand hurts!

I pride myself on doing diligent and persistent research on all the companies that I follow. This includes talking to management on a frequent basis, constantly revisiting my investment thesis for any changes, and monitoring any news that comes out about a company and how it might affect us…

But as we can see, sometimes you are surprised by totally unforeseen factors or circumstances, and nothing you could have done would have changed the outcome, short of inside information.

All I can say is that I was flat wrong about SoundBite, at least for right now.

SoundBite is in the penalty box, and instead of just issuing a sell on the shares, I’m going to take my time, and get some more information on exactly what is going on.

That includes trying to get an interview with the CEO/CFO that I will post on the site, where hopefully, we can get some clarification on what has transpired and not jump to any rash decisions.

After all, in my original investment thesis for SoundBite, one of the risk factors was any kind of change in the business and the lumpiness in earnings from quarter to quarter.

Well, we’ve just hit a proverbial “lump” all right…

I’ve given SoundBite the benefit of the doubt by not delisting them yet to a “HOLD” or “SELL” but the company is officially on notice and the clock starts ticking now.

Shares of SoundBite might fall more from here…it might get painful out there, so if you want to sell now and ask questions later, I won’t blame you, but one bad quarter should never be enough to sell a solid company that hit a bump in the road, or was that a lump?

Along those same lines, because SoundBite’s shares have already been beaten up badly from their initial IPO price, it’s entirely possible that the shares actually won’t drop much more from here because SoundBite is already trading at or near their cash on hand of about $2.30 per share, and their Book Value of about $3.00 per share.

Either way, I want to wait this one out, and see if this was just a temporary interruption of SoundBite’s business or something more serious, before pulling the plug.

I understand that it’s management’s job to curtail unreasonable expectations, and run a business, so I’m willing to give them the benefit of the doubt.

SoundBite gets one quarter to straighten things out, then it’s Hasta La Vista Baby!

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

• Read my latest research report on SoundBite that tells you all you need to know in an thorough, informative and engaging manner.

*As of 5-7-08. Except share price, all values in millions.

The company is GeoEye, Inc. (Nasdaq: GEOY), a small/medium sized business that provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

GeoEye is the leader in a niche field with high barriers to entry, has nice growth prospects ahead of it and several upcoming catalysts that I believe put us in a highly advantageous position.

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.

What follows is a brief description of the company, market, risks, and catalysts.

Look for my full research report detailing every aspect of the company in the coming weeks.

I’ll break down this report into 5 parts:

• GeoEye, Inc.: Who are they and what do they do?
• Who Uses GeoEye?: US, Foreign Governments, and more
• Why Buy Now?: Valuation, Upcoming Catalysts
• Potential Risks: A Lot Can Go Wrong Launching Satellites
• Bottom Line: GeoEye Represents and Excellent Risk/Reward

GeoEye, Inc.

Geospatial and Aerial Imagery Solutions

Look, up in the sky, it’s a bird, it’s a plane, it’s…ok, sorry about that.

Seriously though, have you ever wondered where commercial and government agencies get all their satellite imagery from?

What about some of those cool images that you see on certain websites, or news stories that sometimes show a picture from outer space showing large scale damage from fires, hurricanes or tornados?

And what about scientists that rely on theses type of images for studies ranging from fishing data, to deforestation and even urban planning?

Well, you’ll be surprised to know that there is indeed a company out there that provides these images and data on a commercial level to not just our own government, but also to commercial clients and other governments all over the world.

The name of this company is of course, the aforementioned GeoEye, Inc. (Nasdaq: GEOY).

The global space-based and aerial imagery that GeoEye produces is used by all sorts of companies and government agencies from intelligence agencies, to researchers and even oil and fishing companies that need detailed aerial and geospatial images to perform basic tasks like surveillance, data mining and research to determine the feasibility of certain projects or tasks.

In fact, to get an idea of the types of images GeoEye provides, take a look at their image gallery on their website. Some of these images are truly impressive.

http://www.geoeye.com/gallery/default.htm

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Who Uses GeoEye?

Tons of Customers Span The Globe

GeoEye operates two Earth-imaging satellites, IKONOS and OrbView-2, with a third new satellite scheduled to launch later this summer, GeoEye-1.

They also operate two mapping aircraft, possess an international network of regional satellite receiving ground stations and have advanced geospatial imagery processing capabilities as well as proprietary software and solutions that allow them to interpolate and export their image data in ways that best suit their client’s needs.

Satellite imagery and geospatial and mapping capabilities are used for a broad spectrum of applications both foreign and domestic and include:

• Intelligence Gathering
• National Security
• Homeland Defense
• Precision Mapping Capabilities
• Oil and Gas Exploration
• Mining Exploration
• Environmental Monitoring
• Insurance and Risk Management
• Urban Planning/Assessment
• Construction Planning
• Emergency Preparedness
• National Disaster Assessment

This kind of data can be used for a whole slew of applications such as monitoring borders, gathering intelligence on potential conflicts, planning air, ground and naval missions, deploying resources, and to assess battle damage.

GeoEye’s key customers include both U.S. and international resellers and commercial customers, in addition to U.S and foreign governments. This list includes:

• U.S. Defense Department
• U.S. Intelligence Department
• Law Enforcement Agencies
• Department of Agriculture
• Department of Commerce
• Department of Interior
• Department of State
• Department of Transportation
• Department of Treasury
• EPA, FEMA, NASA
• International Defense and Governments
• Commercial Customers (Telecommunications, Oil and Gas, Airline industry, other utilities, etc.)

International customers represent a substantial portion of GeoEye’s revenue.

Since most countries don’t have satellite collection programs as sophisticated as those in the United States, they tend to rely on limited aerial imagery collection for border surveillance and related national defense programs or purchase imagery from reliable existing commercial satellites, like those from GeoEye.

In addition, the U.S. Government is GeoEye’s largest single customer.

As we can see from this less-than-exhaustive list of applications and customers that use GeoEye’s products and services, the sky’s the limit, no pun intended, in terms of future potential applications for GeoEye and their customer base, as well as current applications and usage.

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Why Buy Now?

Cheap Valuation, Upcoming Catalysts

Valuation

I’ll start with GeoEye’s cheap valuation.

According to my research and calculations, GeoEye trades at about 1/2 where it should be, with an easy argument that it could be MUCH higher than that.

Here are some quick hits:

• Discounted Cash Flow (DCF): GeoEye should be at least DOUBLE from where it sits today using even anemic assumptions.
• Enterprise Value to EBITDA: (EV/EBITDA): Using this metric, GeoEye is at least 145% undervalued.
• Trailing Price to Earnings (P/E): Using this metric, GeoEye is at least 125% undervalued.
• Forward Price to Earnings (P/E): Using this metric, GeoEye is at least 60% undervalued.
• Price to Forward Earnings to Growth (PEG): Using this metric, GeoEye is at least 80% undervalued.

Some quick notes about valuation:

These valuation metrics are based on GeoEye’s competitive sphere and industry, and did NOT include GeoEye’s chief and only rival in this space, DigitalGlobe (NYSE: DGI) that just filed to go public a few weeks ago.

The reason I cannot use any metrics involving DigitalGlobe is because they have not declared an offering price or size, and therefore, there are no valuation parameters that can be drawn until they make their IPO effective, choose a price, and declare the number of shares outstanding, and then we’ll be able to do an apples to apples comparison.

In my upcoming research report, I do a detailed analysis between DigitalGlobe and GeoEye with the various metrics that are possible via their IPO Prospectus, which shows that GeoEye is still the superior company.

Upcoming Catalysts

The timing for my buy recommendation is based on the fact that GeoEye has many upcoming catalysts that will more than likely, influence the stock in a positive way.

I would usually wait until my full research report was available before fully recommending a stock, but in this case, I believe that timing is of the essence.

While I don’t like to “time” the stock market or individual stocks, these types of small and underfollowed companies usually need catalysts to move because they are largely unknown in the marketplace, don’t get as much press coverage, and therefore, rely on catalysts to initiate price movement in their stocks, and bring attention to their companies.

Here are some of the catalysts that I think are crucial to GeoEye in the next few weeks/months:

• Earnings Release Friday, May 9th: GeoEye will be releasing their earnings for Q1/2008 while the market is open on Friday. I expect these earnings to be in-line with past quarters because GeoEye’s latest revenue driver, the GeoEye-1 satellite has not yet been launched, but nonetheless, I expect earnings to be decent to pretty good.
• DigitalGlobe IPO: As I previously mentioned, DigitalGlobe has filed to go public, and can actually be brought to market in as little as a few weeks, to as much as 12 months. When and if they do finally price their shares and decide on their shares outstanding structure, it will bring more visibility to the sector, and to GeoEye, as I believe that GeoEye will rise with the pricing of DigitalGlobe’s IPO offering.
• Launch of GeoEye-1: Part of the reason we are getting GeoEye’s shares at a discount (off from about $35 earlier in the year), is because the launch of their next satellite GeoEye-1 has taken longer than expected, but is nonetheless expected to launch in August, 2008. It takes 4 years from conception, to building, to launch of a satellite, so this is a HUGE deal. Once this satellite launches successfully, GeoEye will realize increased revenues, and Wall Street will breath a sigh of relief that the satellite launched without incident.

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Potential Risks

Lost Satellites, DigitalGlobe IPO

Here’s a VERY brief and quick rundown of some of the possible risks with investing in GeoEye both now, and for the longer term.

I will detail in depth all possible risks in my upcoming research report.

• Earnings disappoint: This is a very short term risk. As you know, all my selections are meant to be made for long term purchases. So while there might be short term volatility in the stock, in our favor I will argue, realize that this can work the other way too, but longer term, we’ll be fine.
• GeoEye-1 Launch Problems: If the launch of GeoEye-1 is further delayed, or if it fails to launch, or has some other complications after launch, GeoEye’s stock will plummet.
• DigitalGlobe IPO: If DigitalGlobe prices their offering BELOW GeoEye’s valuation, or if DigitalGlobe fails to come public, this potential catalyst could become a negative one quickly.
• Other Business Related Risks: Things like one of GeoEye’s current satellites failing or becoming inoperable (as has happened in the past), the loss of significant contracts from the US Government, increased competition from foreign companies launching their own satellites, accounting irregularities in addition to the ones GeoEye already found (more below), and many others.

This list is by no means exhaustive, so please don’t take it as such! These are just the primary short and intermediate term risks that will affect us now.

You can read the rest of the risk factors and what I think their impact could be on GeoEye in my upcoming research report.

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Bottom Line

High Risk, High Reward

This is one of those companies and stocks that makes me rub my hands together quickly when thinking about…you know, like when you are getting ready to eat a good meal, and right before someone says “dig in”?

At any rate, with our portfolio being sufficiently built up to this point with our 4 other recommendations, I feel a little bit of short to intermediate term risk is warranted at this point, and I can think of no other “sure thing” than GeoEye.

The stock has been unfairly punished lately because of the delay in launching of their latest satellite, GeoEye-1 (which is an expected watershed moment), as well as GeoEye filing their last 10-K late because they had to recalculate certain tax loss carry-forwards that led to a restatement of their earnings per share last year in a negative way.

The tax loss carry-forward doesn’t bother me at all, it’s a simple accounting presumption that GeoEye was mistaken about, and had to later add to their earnings release from Q3/2007 to cover taxes that they didn’t feel they owed at the time.

Because of these 2 events, the stock has fallen from $35 earlier this year to about the $25 level where it sits now.

I have been waiting and watching GeoEye for a better entry point to assure us of the best possible risk/reward proposition.

I believe we’ve reached that level, and it’s time to start scaling in at today’s prices with additional purchases if GeoEye dips any further.

As my detailed and thorough analysis will show, GeoEye could easily see its shares double from this point forward within 1 year’s time, and just be trading in-line with its “fair” value.

Like one of GeoEye’s high-flying satellites that most don’t even know about, GeoEye’s stock also flies “under the radar” of analysts and Wall Street, but I expect that to change rather quickly.

Don’t wait until after that has happened, start your position now!

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*As of 5-2-08. Except share price, all values in millions.

I am initiating a third (3) BUY recommendation of SoundBite Communications, Inc. (Nasdaq: SDBT), a leading provider of on-demand customer contact solutions, at or around $4.00 per share.

Sometimes the market presents us with a deal, and we need to be ready to pounce.

Why:

Man, where do I start!

• Read my last company update and buy recommendation here.

It pretty much covers the reasons why I am recommending a purchase of SoundBite again at these levels.

or you can:

Why Has SoundBite Fallen?

The Million Dollar Question…

If I knew, or cared, I would not be picking stocks, but buying lottery tickets.

What I do know and understand is that we are being presented with an opportunity, and quite frankly, a gift.

The only possible scuttlebutt that MIGHT be influencing the price of SoundBite comes from a filing that they filed with the SEC last Friday, April 25th, a form S-8, which is a registration statement of shares that can be sold once their lock-up period expires.

Now, this registration statement could be causing some confusion in the market for a couple of reasons:

1. It isn’t exactly clear that this statement is in fact for owners of the company’s shares to be able to sell them once the lock-up period expires, a standard procedure for any company that has come public and their lock-up period is nearing, and instead looks like it might be a registration filing for a follow-on offering that would dilute shareholders, a big no-no.
2. The perception by the market, if they do understand what this registration statement means, that all of a sudden, we’ll have a huge deluge of shares flooding the market and putting downward pressure on SoundBite’s shares.

Of course, both of these reasons have built-in falsehoods that we can take advantage of.

First of all, this statement is just that, a statement of fact letting shareholders and the market know that everyone who was originally stated to have owned shares before the IPO, is again being stated as a matter of procedure.

All public companies do this, and are required to do so within a certain time frame of their lock-up period, or else employees won’t be able to sell shares.

Secondly, if you read the filing closely, the average strike price of the shares in question is about $3.00 per share in aggregate, with most of the shares being priced at an average price of $1.19 per share.

I don’t know about you, but with SoundBite’s shares sitting at about $4.00 as I sit and write this today, there aren’t going to be many happy campers or investors lining up to sell their shares for a measly $1-3 gain on a few thousand or even hundreds of thousands of shares.

Trust me when I say that there won’t be a mad dash to the exits for insiders and executives!

And if any of them are that anxious to sell, so be it, with the low float and share price, there are many institutional and individual investors, like us, that have been waiting for more liquidity in the stock anyway, and I don’t foresee the share price dipping lower because of this.

Bottom Line

Hold the Line…

Man this is getting to be old hat, but that’s exactly how we do things around here at PeakStocks.com

My absolute passion, is finding these kinds of stocks, making sure the story is straight, and then telling the world about them and investing right alongside my readers.

This instance is no different.

If you’ve been waiting to purchase shares of SoundBite, or have already bought but are ready to scale in some more and cost-average downward, there’s no better time than right now.

Say thanks to the market!

I say this of course knowing full well, and making sure that you do as well, that SoundBite might go lower before it recovers (although SoundBite’s Book Value is $3.00 per share, and it has cash on hand of $2.30 per share, so there is a downside limit here).

If you are scared, then buy a small amount, but I am upping to a full position in SoundBite as I believe this is the proverbial “fat pitch” that Warren Buffett always talks about:

When you see a fat pitch coming straight down the middle of the plate, you have to take a big swing and go for the home run.

After all the diligence and research that I’ve put into this company and the fundamentals, management team, business model, and prospects, there’s nothing left for me to say but it’s time to put our money where my mouth is.

That’s precisely what I intend to do.

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

• Read my latest research report on SoundBite that tells you all you need to know in an thorough, informative and engaging manner.

*As of 4-30-08. Except share price, all values in millions.

AuthenTec (Nasdaq: AUTH), the world’s leading provider of fingerprint sensors and solutions, released their Q1/2008 earnings and held their analyst conference call Monday, April 28th after the market closed.

As a result of AuthenTec’s latest earnings release as well as rapidly accelerating business trends, which go way above and beyond my expectations, I have upgraded my opinion on AuthenTec from a HOLD to a BUY.

What follows is a summary of AuthenTec’s earnings announcement, conference call highlights, and my reasons for the upgrade.

Click here to read my complete AuthenTec research report and buy recommendation

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Sales, Earnings, Margins: All Up
• Other Business Highlights: Raises Guidance, Cash Flow Positive
• Conference Call Highlights: Litigation Update, Acquisition Impact
• Bottom Line: It’s Time to Revisit Shares of AuthenTec

Hit Me With Some Numbers

AuthenTec Beats Estimates Once Again

Here are some of AuthenTec’s earnings highlights (growth from previous year’s 1Q/analyst’s estimates where applicable):

• Quarterly sales of $15.5 million (up 67% from prior year/vs. $15.16 million projected)
• Non-GAAP quarterly income of $587,000 (up from a -$1.7 million loss in the prior year)
• GAAP quarterly income of $188,000, or $0.01 per diluted share (up from a -$5.7 million, or $7.30 per diluted share, loss in the prior year)
• Non-GAAP $0.02 earnings per share (up from a -$.09 loss in the prior year/ vs. $.02 projected)
• Gross margin improves to 49.6% (up from 46.1% from prior year)

My Take: Once again AuthenTec put its head down and continues to execute as we’ve come to expect from this small but rapidly growing company.

You’ll notice that the $.02 earnings per share this quarter was in-line with analysts estimates, but would have been $.03 per share if it weren’t for the acquisition of EzValidation. Otherwise, AuthenTec also handily beats analysts expectations for earnings per share.

In addition, you can see the continued gross margin improvement from the prior year as AuthenTec gains traction and scale with their business and introduces a better product mix that enables them to get higher margins and better yields.

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Other Business Highlights

Accelerating Business Trends Mark Inflection Point

• For the 2nd quarter of 2008, AuthenTec is projecting sales of between $17.2-17.8 million vs. analysts estimates of $15.5 million.
• The ramp-up of their new sensor, the AES2810, is allowing them to raise their Q2 guidance to $17.2-17.8 million, the midpoint being 42% growth over the prior year, and 13% sequential growth.
• Operating expenses as a percent of revenue declined to 51 percent in the first quarter of 2008 from 65 percent in the year-ago quarter.
• For the 2nd quarter of 2008, AuthenTec expects non-GAAP earnings per share to range between $0.02 to $0.03 per share, compared to a loss of -$0.03 per share in the second quarter of 2007 vs. analysts projections of $.02 per share.
• Margins expected to range from 47-49% for the rest of 2008 because of the ramp-up of new chips with lower yields and inefficiencies typical of new product introductions and scaling.
• $67 million in cash and short term investments, vs. $66.3 million in Q4/2007
• Operating cash flow was $545,000 in the quarter
• CAPEX: $190,000
• Free Cash Flow: $355,000
• 48 days on hand of inventory vs. 59 in Q4/2007

My Take: This is where it gets juicy.

You see, AuthenTec significantly raised their guidance for the second quarter, and thereby their expectations for the full year. It seems they were able to ramp up production of one of their newest sensors, and had higher demand from customers earlier than previously anticipated.

In addition, AuthenTec increased their cash position, had a cash flow, and free cash flow positive quarter, and tightened up other operating efficiencies such as inventory levels.

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Conference Call Highlights

Patent Litigation Continues, Acquisition Strategy Comes Into Focus

The following are the highlights from AuthenTec’s analyst conference call:

• EzValidation Discussion: I had spoken previously about what this deal meant for AuthenTec, but in the conference call, management added more color to the discussion.

First off, the acquisition cost AuthenTec $250,000 in cash which was only for EzValidation’s client based software that resides on the PC, which will allow AuthenTec to enhance the user experience with their current fingerprint sensors.

We will see integration of this software in the 3rd quarter of 2008 as a value-added service to AuthenTec’s customers.

EzValidation’s software uses a Graphical User Interface (GUI) and other feature representation to allow customers using cell phones and PC’s that use AuthenTec sensors, to help them be more aware of the sensor and to also make it easier for them to actually use the sensor and understand it, etc.

From what I gather, AuthenTec will offer this as a value-add, and make some incremental revenue from it.

Current clients either already use their own software to feature AuthenTec’s sensors and its capabilities, or that of a partner or 3rd party.

For the first time, once EzValidation is incorporated into AuthenTec’s client software, the choice of what software to use will include an offering from AuthenTec, rather than clients having to create their own, or use a 3rd party.

This will be a great way for AuthenTec to garner some incremental revenue as things move forward and more customers decide to use AuthenTec’s ready-made software solution.

• Patent Infringement Suit Update (AuthenTec Vs. Atrua Technologies): AuthenTec stated that the suit was initially filed alleging infringement on 3 AuthenTec patents, but has since been expanded to include a total of 5 US patents.

Legal expenses are expected to be about $150k in Q2, and about $500k for the remainder of the year.

I was disappointed that management did not update the other infringement lawsuit with Atmel (Nasdaq: ATML), and no analysts asked them about it either.

I’ll have to do some of my own digging on this and report back when I find out how that suit is progressing.

• Overall Economy’s Affect on Business: Again like last quarter, the CEO talked about how they are not seeing any impact from the overall economy or the credit crisis.

He stated that because they are in the early stages of their growth and are in fact ramping up production and introduction into new products, and are penetrating more already established products, macroeconomic factors are not currently infringing on their business.

• Research and Development Costs (R&D): AuthenTec said they will be using any revenue ramp-ups, like the upcoming one in Q2/2008, for additional R&D spending.

So while their operating margins will come down as a % of revenue over time, they will increase on an absolute basis, and will also increase whenever AuthenTec can take advantage of spikes in revenue or business trends, such as the aforementioned Q2.

• AuthenTec sensors are now integrated into 8 of the 9 leading enterprise and consumer notebook manufacturers, all except Apple (Nasdaq: AAPL).

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Bottom Line

This is exactly what I wanted to see from AuthenTec.

They cleanly executed their last quarter and raised guidance for next quarter, and invariably the full year, and are ramping up sales at a faster and faster clip as time goes on.

Here’s why I am moving AuthenTec to a BUY:

• Well executed quarter with no signs of a slowdown or deterioration of business trends.
• Forward guidance that BLEW away analysts expectations. They’ll be scrambling to raise their numbers today.
• AuthenTec has met or beaten analyst’s expectations every single quarter as a public company, and always raised guidance. I expect this trend to continue in a big way.
• AuthenTec is the leader in their niche. No one comes close or sells as many sensors as AuthenTec does, and this trend is only accelerating.
• The fingerprint biometrics market is rapidly expanding and these sensors will be intertwined into our cell phones and computers, if they aren’t already, sooner than later.
• Insider selling has subsided after my previous trepidations concerning the CEO selling shares on the open market for BELOW the price that he had previously bought shares on the open market. However, this item is still a concern with insiders like Harris Corp. (NYSE: HRS) still dumping shares, albeit for completely different reasons than company execs.
• The patent litigation front is progressing as well as can be expected, and unfortunately for this type of company, is par for the course.
• I’ve come to terms with the fact that valuation will never be “cheap”. Rapidly growing companies that continually exceed and raise guidance are never going to be had for a discount, and if they are, you better pounce! As long as you can purchase shares at a “good” price, you hold your nose and scale in with a long time frame for holding the stock.

My previous reasons for downgrading the stock have been assuaged for the most part, and I’ve concluded that even though AuthenTec’s valuation is not “cheap” it probably will never be cheap.

As such, because of the rapidly accelerating business trends, margin expansion, sales increases, guidance revisions, and flawless execution by management, I am confident that as long term shareholders, we will be handsomely rewarded for our patience and diligence.

If you don’t already own shares of AuthenTec, take a dip, scale in, buy on “weakness”, and then sit tight for a long term story that will become as ubiquitous as cameras are now in cell phones.

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• Click here to read my complete AuthenTec research report and buy recommendation

*As of 4-28-08. Except share price, all values in millions.

I wanted to update you on latest happenings in which AuthenTec has made an acquisition, released a brand new fingerprint sensor technology (their 3rd new sensor/enhancement since the beginning of the year), and updated their earnings expectations as a result of that acquisition.

I’ll break down this report into 4 parts:

• AuthenTec Acquires EzValidation: Acquisition designed to improve AuthenTec’s end-to-end product offerings
• AuthenTec Introduces TouchStone: Enhances existing fingerprint designs
• Earnings Guidance: Acquisition changes things somewhat
• Bottom Line: Wait and see

AuthenTec Acquires EzValidation

Makes a Move to Bolster Intellectual Property

On April 16th, 2008 AuthenTec announced that they had purchased all the software assets of EzValidation, formerly a California-based provider of fingerprint sensor authentication and user interface software.

AuthenTec acquired the entire portfolio of EzValidation software, including its offering called EzPassport, which is fingerprint authentication software developed by EzValidation.

The transaction is expected to strengthen AuthenTec’s complete client offering, providing complementary authentication software that enhances the fingerprint sensor user experience.

EzPassport is an easy-to-use fingerprint authentication software application for Microsoft Windows-based systems and offers easy user setup and enrollment, and features Windows login, password replacement, file and folder encryption, application launch, screen-saver lock, and auto logoff via a very intuitive graphical user interface.

The first offering of a bundled software solution from AuthenTec, which includes key features of EzPassport, is expected to be available in the third quarter of 2008.

“This transaction will help further strengthen our complete solution, making client applications for our sensors more intuitive and easier to use,” said AuthenTec Chairman and CEO Scott Moody in a statement.

“We plan to add the best features of EzPassport to AuthenTec’s software offering, enhancing the fingerprint sensor user experience. I would note that application enhancement efforts such as this are focused on the PC client, and that we will continue to collaborate with our Solution Provider Network to enable complete end-to-end enterprise solutions, ” continued Mr. Moody.

My Take: We were told in the last conference call that AuthenTec was looking to make some acquisitions, and if they did, they would merely be software related, and not designed to increase market share and the like via an acquisition of a direct competitor.

True to those words, I think this is just the kind of smart and purpose-based acquisition a small company like AuthenTec needs to make their products more desirable, not just from a functionality standpoint, but also from the end-user experience whereby their clients are looking to integrate AuthenTec’s solutions with as little headaches as possible.

Think of this as a type of upgrade that makes your computer easier to use. It might not make you want to buy that computer, but if you keep making things easier on your client base, you continue to incrementally improve your offerings and thus make your solutions more appealing when pitching to potential customers and keeping the ones you already have happy.

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AuthenTec Introduces TouchStone

Enhances Flexibility and Aesthetic Options for Mobile Phone Designers

On April 1st, 2008 (hopefully not an April Fool’s joke!) AuthenTec’s unveiled a new patent-pending packaging technology called TouchStone that is designed to enable a new class of fingerprint sensors that combine all the features of AuthenTec’s TruePrint technology with thin, durable, easy to integrate, waterproof and surface-mountable packaging for today’s stylistic cell phone designs.

ToushStone is designed to allow fingerprint sensors to be more durable and withstand the daily grind of being in one’s pocket and rubbing on change, keys, pens and the like, as well as the potential for wear and tear from normal use that might render a sensor not protected by this technology, less useful and have a shorter life, than one that is protected with TouchStone.

TouchStone technology extends the already proven durability of AuthenTec sensors by tripling the protective coating over the fingerprint sensor die.

Its thin package profile also enables flat surface mounting on the outside of a mobile device’s case, providing improved tactile feel when using AuthenTec’s TrueNav menu navigation feature.

TouchStone’s sensor packaging thickness is less than half the thickness of a typical fingerprint sensor package.

As usual, TouchStone-packaged sensors will be based on the company’s patented TruePrint technology, AuthenTec’s unique solution that reads below the surface of the skin to the live layer where a person’s true fingerprint resides.

This unique subsurface approach enables AuthenTec sensors to read virtually every fingerprint, every time — a critical requirement in any fingerprint-enabled device. And like previous generations of AuthenTec sensors, TouchStone technology will allow the use of the company’s TrueNav menu navigation features, TrueFinger anti-spoofing security, and TrueMatch pattern matching.

The first AuthenTec product available in TouchStone packaging will be the new AES1711 low-power sensor for the wireless market, with production quantities expected in the fourth quarter.

My Take: Another great product enhancement for AuthenTec.

The addition of TouchStone technology will allow AuthenTec’s customers to now integrate their fingerprint sensors in devices that previously were not suitable for fingerprint sensors because of the added wear-and-tear that would render them useless.

Now manufacturers can incorporate AuthenTec’s fingerprint sensor designs into any product that requires high levels of durability and waterproofing, from cell phones, to computers, to key fobs, but with the ability to still be accurate and dependable.

TouchStone is a great step in accelerating and diversifying AuthenTec’s adoption and product penetration at the manufacturer and partner level.

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Earnings Update

Acquisition Related Charges Impact Q1/2008 Earnings

With the purchase of EzValidation, AuthenTec’s GAAP earnings will be impacted somewhat in the first quarter.

According to AuthenTec, this asset purchase is being recorded as in-process Research and Development (R&D) and will be dilutive to AuthenTec’s first quarter earnings per share by $0.01 per share.

However, first quarter non-GAAP earnings per share are still expected to be in a range of $0.01 to $0.02, per the guidance provided by AuthenTec on February 4, 2008.

In addition, AuthenTec has just announced that they will be hosting their first quarter conference call and earnings report on Monday April 28th, 2008 after the market closes.

This earnings report will allow us to check-in with AuthenTec and see how things are stacking up thus far in 2008.

My Take: I certainly don’t mind a company making smart and value-added acquisitions that will enhance their product offerings and make them more appealing to current and future customers, even at the expense of short-term earnings.

What will be more important for me as far as AuthenTec is concerned, is their quarterly report and conference call, as well as their future guidance.

I don’t expect any surprises or downward revisions to past guidance, but I also don’t expect any significant upward revisions or a “blow-out” quarter either.

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Bottom Line

Still Wait and See

This is all good stuff, and the rate at which AuthenTec continues to execute and enhance their product offerings is exactly what I want to see.

However that being said, I want to see what AuthenTec has in store for us this quarter and next before upgrading them based on my past article about the valuation and risk/reward scenario not favoring us as much as it should, as well as the insider selling that has not yet stopped.

You can read that initial downgrade here.

In hard-line terms, there is nothing “wrong” with the AuthenTec story, just a bunch of small stuff (the insider selling could be a “big” thing) that make me less comfortable recommending new money be put to work in AuthenTec at this time.

Once again, I recommend dipping your toes into the water here because there is a possible positive catalyst (earnings) coming up, and the shares have been beaten up pretty good, but don’t expect this stock to rocket anytime soon, barring any major announcements, partnerships, or business deals.

That’s why I would recommend a small buy at these levels, and otherwise, hold onto the shares you already have until we get some more visibility in the coming months and valuation gets more favorable for us.

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• Click here to read my complete AuthenTec research report and buy recommendation

*As of 4-17-08. Except share price, all values in millions.

I suppose we can all breath a collective sigh of relief to the news that Boeing (NYSE: BA) has “officially” cleared AAR Corp. (NYSE: AIR) of any wrongdoing in their purported FAA violations in painting certain model landing-gear truck beams in ways that were not kosher.

On March 25th, the FAA issued a Unapproved Parts Notification (UPN) letter that stated that during a multi-year investigation, which lasted from the start of 2001 through Nov. 26, 2007, the FAA found that the AAR landing gear service center in Miami “improperly maintained and approved for return to service” parts used in Boeing 707, 747, 757 and 767 planes.

The part in question is called a landing-gear truck beam.

The truck beam is the main component of the landing gear. It goes across the entire component from axle to axle, and looks like an upside-down T.

This vertical bar acts as a shock absorber and is very important in terms of landing stability and strength of the entire mechanism.

The FAA’s notice refers to an enamel paint applied to the inside, or “bore,” of the horizontal bar, and the potential for that paint to obstruct a drainage hole in the beam, thus masking potential corrosion and preventing proper drainage.

You can read my entire take on the situation, including some possibly disturbing news on a plane that collapsed while refueling that was serviced using one of the AAR’s truck beams here.

Boeing Gives The All Clear…Sort Of

Parts Deemed Acceptable by Manufacturer

In a letter to its customers on April 8th, Boeing reconfirmed that the enamel applied by AAR as a top coat to the inner diameter of landing gear truck beams “…to be equivalent to drawing finish requirements and can be considered acceptable subject to all other standard overhaul processes and applicable CMM (Component Maintenance Manual) instructions being followed at the time of the overhaul.”

Boeing also stated in the letter that while the preferred finishing method described in the applicable truck beam CMMs for 747, 757 and 767 aircraft does not require an enamel top coat “…the presence of enamel top coat is not detrimental and is equivalent to the design finish and hence type design.” for these aircraft models.

Umm…ok, that sounds like a ringing endorsement to me.

AAR stated in their press release:

“In deference to Boeing’s preferred finishing method, AAR Landing Gear Services discontinued applying the enamel top coat to internal truck beam surfaces of 747,757 and 767 landing gear earlier this year. “

So basically, AAR has known about this possible infraction for quite some time, and had already instituted a change in their repair and overhaul specs. for these parts well before any news of this got to the media.

Bottom Line

Stock Takes a Wallop on News, Yet to Recover

The good news for us is that AAR doesn’t expect any liability claims or financial penalties from the FAA for the perceived oversight, and this news should have little to no bearing on their earnings, revenues, and overall business.

Tell that to investors however, as they sent AAR’s shares down to the dumps this past week.

As I stated in my last post about this subject, if it weren’t for all the hype and recent attention being paid to various airlines and their maintenance problems, the Wall Street Journal, which originally broke the story, probably would never have even pounced on this news, as this type of parts oversight and incorrect application of a manufacturer’s standards happens every now-and-then.

It would be foolish to sell AAR’s shares now that their valuation has come down so much further than where I originally recommended them, but some rough times could be in the cards especially since there are no positive catalysts for the stock anytime soon (AAR just recently had their earnings and conference call), and the continued negative sentiment caused by this story could continue to weight heavily on the stock price for some months to come.

I will stay on top of the situation and monitor it closely, but as of right now, I don’t see this as a long term negative for the company or the stock, and I believe the market has grossly overreacted, and this is probably a wonderful opportunity for you to get some shares of AAR for a price that is approaching book value, and needless to say, a price that is WAY below what AAR is worth using any metric out there.

My take: If I weren’t already fully invested in AAR (I have over a full position), I would be re-recommending purchase of AAR at a valuation and price that will look downright laughable in the months to come.

• Click here to read the complete AAR Corp. research report and buy recommendation

*As of 4-15-08. Except share price, all values in millions.

SoundBite is the dominant player in their niche (Automated Voice Messaging/Customer Contact Solutions), growing faster than their overall market and taking market share away from competitors.

In addition, their dirt cheap valuation relative to their fundamentals leaves me scratching my head as to how Wall Street can be so wrong about this company, and compels me to re-recommend SoundBite as an immediate BUY.

If you haven’t already done so, you need to add shares of SoundBite to your portfolio, here’s why:

I’ll break down this report into 5 parts:

• Latest Financials: SoundBite’s latest financials, earnings
• Margin Trends: Onward and upward
• Latest Valuation: Dirt cheap, it’s time to pounce
• Rounding Out The Business: The latest news out of SoundBite
• Bottom Line: Add to, or start your SoundBite position immediately

Let’s get right into it.

Another Great Quarter/Year

Earnings Beat Estimates, Company Raises Guidance

Let’s take a look at the growth trends and overall financial performance within SoundBite’s business over the last 3 years, with 2008 estimates where applicable.

Note that diluted shares increased exponentially because of SoundBite’s IPO so I didn’t bother including the previous years’ diluted share data before 2007.

The interesting thing to note when looking at these trends is that SoundBite’s top line grew about 36% this year (2007) and is projected to grow 35.4% next year (2008). This is great news, as it shows that they are actually growing sales at a faster clip on an absolute basis, and keeping the % growth in line from year to year. This is what we call accelerating sales growth.

Don’t forget as well that analysts have raised these projections every single quarter as SoundBite blows by their estimates. It wasn’t too long ago that the growth rate for both 2007 and 2008 were below 34%!

Either way, I think that analyst’s estimates are lower than they should be, so you know where that leaves us.

For 2007 SoundBite finally showed a positive EPS, and continued to be cash flow positive to the tune of about $3.28 million dollars.

You can see the cash flow trends for the last 3 years, which shows a huge cash flow improvement over the previous years.

Finally, free cash flow is also improving rapidly.

Ultimately this is the bottom line. How much cash are they actually keeping once everything is all paid for.

As they accelerate their top line, improve their margins, and drop more income to their cash flow figure, their free cash flow will turn positive well within the next year or so, and this is when things really start ramping up, and Wall Street will really take notice.

Either way you slice it, SoundBite is leveraging their top line into further improvements to their bottom line numbers. This year is a turning point in terms of accelerating their top line, and becoming both cash flow and free cash flow positive going forward.

Here are the highlights from their latest earnings announcement (4Q/2007) on February 27th, 2008:

Looking at SoundBite’s prior year comparison, it’s not quite as impressive as the overall 3-year table above.

However, you have to remember that SoundBite’s revenues and growth are lumpy from quarter to quarter, so this type of stuff happens often.

That’s why we need to take the view of SoundBite’s business from year to year, not from quarter to quarter.

Even so, you can still see the increasing leverage of SoundBite’s business model as they continue to expand margins, profitability and drop more and more cash to the bottom line.

Finally, share count increased significantly due to the IPO.

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Margin Trends

Onward and Upward

Looking at a company’s margins is critical to understanding their past performance and future prospects. Usually, businesses start out with smaller margins and they expand over time as the business becomes more efficient, and scales.

Let’s look at SoundBite’s 3-year margin trends and see how they stack up.

We can see that SoundBite is really starting to leverage more and more of their top line revenues into bottom line operating and net margins.

From here on out, SoundBite will begin to establish the capabilities of their business and their ability to scale and thus begin to leverage more of their top line into bottom line growth.

Although quarter-to-quarter margins are lumpy for SoundBite, you can see that the yearly trends speak favorably for the business as we head into 2008.

Finally, according to their latest guidance, SoundBite is targeting a long-term gross margin in the range of 62-65%, so it appears they will stabilize their cost of sales going forward at the level they are at now, and then slowly leverage their operating and net margins as time goes on and they scale upwards.

Now, let’s zero-in on SoundBite’s margins for the last 6 quarters.

SoundBite’s margins can be lumpy from quarter to quarter based on their revenue and client mix, as well as expenses.

Traditionally, the 4th quarter is their best on the revenue and margin side and you can see that’s the case here.

The reason for the steep drop in margins in Q1/2007 was because of their rapidly expanding business, the ramp-up of new technology, and the hiring of new staff to handle their increasing volume of customers.

Look for all of these margins to improve, but not in a straight line, as we go forward. The longer term trend is for stable gross margins within the previously specified range of 62-65%, with steadily improving net and operating margins going forward now that SoundBite has a more stable client base and has sufficiently ramped up their sales force and support staff.

As a percentage of revenue, operating expenses for staff and infrastructure are going to decrease, and we can see that already playing out both in the year over year figures above, as well as the last 6 quarter trends.

The way I see it, it’s fine for a company to take a temporary hit on margins, free cash flows, etc., to grow their business when the need and the opportunity arise.

I think these metrics will be less and less lumpy going forward as SoundBite scales their business model and expands their client base in order to be less reliant on the timing and seasonality of the collections industry which typically sees their usage of SoundBite’s systems peak in the 4th quarter of each year.

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Valuation

Dirt Cheap and We All Know It

I have chosen the following metrics for valuation purposes for SoundBite:

• Discounted Cash Flow (DCF)
• Price-to-Sales Ratio (P/S)
• Enterprise Value to EBITDA (EV/EBITDA)
• Price-to-Earnings Ratio (P/E)
• Price-to-Earnings/Growth Ratio (PEG)

Discounted Cash Flow (DCF):

Using a modified DCF analysis, here’s what I get under 3 different scenarios:

• Best Case Scenario: SoundBite’s shares are valued at anywhere from $15.81 - $18.33 per share ($17.07 median)
• Middle Scenario: SoundBite’s shares are valued at anywhere from $9.63 - $10.84 per share. ($10.23 median)
• Worst-Case Scenario: SoundBite’s shares are valued at anywhere from $5.30 - $5.86 per share ($5.58 median)

Using the DCF metric, SoundBite’s share value is trading way below its intrinsic value of about $11.33 per share, and should be at least double where it stands today.

Upside potential of 126%.

Valuation Table:

Since SoundBite has no direct public company that it competes with, I made certain assumptions and chose certain companies that I thought matched up well with what SoundBite does, and where I think they should be valued.

I’ve consolidated the other valuation metrics into the following table along with those of SoundBite’s competitors or comparable companies:

Some quick valuation metrics:

• Using P/S: Fast growing companies always deserve a higher multiple than slower growing companies, but even if we assume SoundBite’s growth is slightly slower than its peers (which is true for top line growth, but not profit growth), SoundBite is still trading at a huge discount to where it should be by at least 100%.

If we look at profitability going forward, then SoundBite is trading at an even larger discount to its peers by about 200%.

This doesn’t even include the overall industry multiples, which put SoundBite at a steep discount to the overall industry that is growing much slower than SoundBite.

Upside potential of 100-200%.

• Using EV/EBITDA: On the same token as the P/S ratio above, if we take into account SoundBite’s Enterprise Value (EV = Market Cap + Total Debt – Total Cash & Short Term Investments) divided by EBITDA (Earnings before interest, taxes, depreciation, and amortization), we see that the company is trading at a very steep discount to its peers.

When taken together, the EV/EBITDA ratio is a great way to measure companies across an industry excluding one-time profitability items, different tax rates or one-time tax effects, and their total debt.

It’s a sort of “equalizer” when it comes to valuing companies.

That being said, SoundBite’s EV/EBITDA ratio is an amazingly low 10.93.

In fact, SoundBite is so well capitalized that they have about $2.30 per share in cash in their coffers!

That represents almost 50% of the total share price, and is a valuation more on par with a company that is suffering through some bad times, not one that is thriving and accelerating revenues and profits like SoundBite.

Companies that churn out cash, and have a fat cash hoard on their balance sheet usually always receive premiums over companies that are leveraged and have a lot of debt.

Likewise, companies that leverage their sales and profit as SoundBite does with growing and expanding revenues, profit margins, and bottom line profit excluding the aforementioned items, always trade at a premium, NOT below fair value.

Upside potential of 100-400%.

• Using FORWARD P/E: Analysts are pegging SoundBite’s earnings to be about $.14 per share in 2008 and $.31 per share in 2009, which I feel are both conservative numbers.

That being said, in the table above, I used the projected 2008 numbers for comparison’s sake. If we use the 2009 projected numbers, SoundBite’s P/E ratio drops to 16.13.

But remember, when a company is just starting to earn a profit as SoundBite is, using trailing or even forward P/E ratios is tricky because there is no established track record, and the forward projections can be skewed immensely by revisions either up or down.

Using this metric, SoundBite looks a little overvalued compared to its peers and industry, but again, a fast growing company (the average growth in the industry is about 20%) deserves to be valued higher, and remember that SoundBite just became profitable, so a basic P/E ratio is almost useless until a few years down the line.

Now, be careful when analyzing the growth trends of the companies listed above. Most of these company’s growth rates will be slowing in the coming year(s) while SoundBite’s is remaining steady and even accelerating, therefore it deserves to be at LEAST valued on par with its peers.

In fact this is indeed the case, as we can see that analysts project SoundBite to increase earnings per share (EPS) by at least 35% over the next 5 years, while the other companies and the industry as a whole, with the exception of Salesforce.com, are all expected to grow much slower.

Using the projected 2009 figures makes SoundBite’s shares look much more reasonable and “cheap”, but again that far out there is way more risk of them missing earnings (which will hammer the stock price) or some other business event happening (not to mention a slow-down in the business itself), that would bring these estimates into question.

Bottom Line: Using traditional P/E ratio metrics, while useful for more mature businesses, are not as beneficial to us in measuring SoundBite’s true scale and eventual profitability at this time, but even so provide us with another piece of info that show the shares aren’t being respected and getting the premium valuation that they deserve because of their added and accelerating growth.

• Using Price to Earnings Growth (PEG): A good measuring stick to use for risk/reward ramifications, is to look for a forward PEG with some downside protection, so anything around 1 or less is usually considered less risky (although there already is plenty of risk involved when looking that far out ahead, which is why you want a lower PEG multiple and not a higher one).

In 2008 analysts expect SoundBite’s earnings to grow to $.14 per share over about $.03in 2007.

Assuming SoundBite earns $.14 this year and grows to $.31 next year, this would yield a growth rate of over 121%.

If we just use 2008’s forward numbers, we get the PEG ratio of about 1, which looks like a great bargain, and doesn’t even include the ramping up of sales in 2009 and beyond.

You can see this discrepancy reflected in the forward 5-Year earnings estimate provided by analysts, of which SoundBite’s is 35%.

Analysts and other investors are using their “best guesses” to estimate FUTURE earnings potential, and thus are assigning this rough estimate to the next 5 year’s of growth on a compound annual rate.

Like I said, anything around 1 (sometimes for really fast growing companies, ahem, like this one, you might pay up to 1.5 PEG), and certainly anything UNDER 1 is a steal.

This gives us more information to look at to better understand valuation, and when to pull the trigger on a trade to minimize downside risk and maximize upside potential, otherwise known as the RISK/REWARD, and something I look at very carefully and take very seriously here at PeakStocks.com.

But even with this multiple, SoundBite still looks way undervalued if we just take 2008 numbers, let alone the incredible growth forecast for 2009.

Bottom Line: Using the PEG multiple valuation metric, while flawed, gives us a better indication of SoundBite’s potential, and its valuation. I believe that using this metric, SoundBite is undervalued by at least 100% or more, which could prove conservative if they beat estimates again, and raise future guidance.

Upside potential of 15-25% (using a 2008 PEG of 1) to 50+% (using a 2008 PEG of 1.5).

Upside potential of 117-261% (using a 2009 PEG of 1) to 326+% (using a 2009 PEG of 1.5).

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Rounding Out The Business

Here are some other quick reasons why it’s prudent to add to your SoundBite position or start one immediately:

• SoundBite continues to dominate its market niche and is gaining traction and market share.
• Valuation sits at a supreme risk/reward level.
• For the 1st quarter of 2008, SoundBite is projecting sales of between $10.7-11 million vs. analysts estimates of $10.45 million.
• For the full year of 2008, SoundBite expects revenue to range between $53.3 million and $55.3 million, up from $39.5 million in the previous year vs. $52.3 that analysts were projecting.
• URS Litigation Update: As explained in my original research report, SoundBite is suing Universal Recovery Systems, URS, for tortuous interference, and unfair and deceptive practices for interfering with their IPO, and bringing false patent claims against SoundBite.

Since that time, depositions have been taken, and documents filed and recently, URS sought to dismiss the lawsuit, and SoundBite expects to vigorously oppose the motion and believes the court will rule in their favor.

If the suit is not dismissed, a trial has been set for May of 2008.

Given the facts and circumstances presented thus far, SoundBite believes that pursuing legal action against URS will prove to be a “good investment” for them.

• Acquisition of Mobile Collect

It’s time to add text messaging to the list of ways that SoundBite can contact customers on their client’s behalf.

SoundBite acquired Mobile Collect in an all-cash transaction for $500,000 plus additional contingent consideration of up to $2 million based upon a certain percent of text messaging revenue.

Just like SoundBite, Mobile Collect is a Software as a Service (SaaS) provider of customer contact solutions, but dealing strictly with SMS or text messaging.

The most important part of this acquisition is the fact that Mobile Collect is a pioneer in Free-to-End User (FTEU) text messaging.

In fact, as of today’s press release (4-8-08), SoundBite is currently the only provider to implement FTEU text messaging on all four major wireless carrier networks, reaching 81% of U.S. wireless subscribers.

As a result, organizations that utilize SoundBite’s hosted, multi-channel communications platform are now able to deliver these messages to their customers using AT&T (NYSE: T), Sprint (NYSE: S), T-Mobile (NYSE: DT) and Verizon Wireless (NYSE: VZ) networks.

SoundBite’s text and automated voice messaging solutions support inbound, outbound and interactive customer communications.

So why is FTEU important?

Because text messages aren’t free and most of us are charged per text message, anywhere from $.01-.05 or more, unless we subscribe to various plans that can bring this cost lower for more frenetic text messagers.

This is also potentially a huge market, as more than 240 billion text messages were delivered in the U.S. during the 12-month period ending July 2006, and more and more people would rather receive a text message than a phone call, and companies are only to happy to oblige to keep their costs low and get a higher response rate to a less “intrusive” form of communication.

On top of that, this solution allows SoundBite to now deploy multiple customer contact solutions.

A campaign can be set up to first send you a text message letting you know your phone bill is overdue, then SoundBite’s system can follow that up with an email, followed by a voice mail, finally followed by a phone call where you actually speak with an agent.

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The Bottom Line

If You Haven’t Already, It’s Time To Get In

Look, there are no guarantees in life, let alone investing.

However, if you eliminate the unknown from the equation, do your thorough analysis and research into an incredible company and stock, and virtually eliminate your downside risk, you increase your chances to beat the market, no strike that, CRUSH the market.

I’ve done all the leg work for you, all you have to do is press the “buy” button and sit back and watch the SoundBite story play out.

You’ve got a niche business, a growing market, a stock that sits at about $5.00 per share as of this writing with a company that has about $2.30 per share in cash on the balance sheet, and is undervalued by virtually any metric you use, and finally, a company growing earnings and sales at extraordinary rates.

Needless to say, SoundBite grossly qualifies for my Double Thesis.

If you want to take your time and pussyfoot around thinking about buying shares of SoundBite, be my guest, but I’ll say this with the highest possible level of confidence that I can portray: SoundBite WILL go up from here.

I don’t know when, but it’s only a matter of time.

Stop reading this, open a new browser window right now and point it to your brokerage account.

Place the order and get on board this great opportunity before it’s too late.

• SoundBite trades with large Bid/Ask spreads. Learn how to protect yourself from getting screwed by the market makers.

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• Read my latest research report on SoundBite | PDF (340 KB)