You’re phone is ringing again…should you pick it up?

“I dunno…” you say to yourself, “could be telemarketers bugging me again.”

As the phone continues to ring, you decide to finally pick up the phone and answer it.

Sure enough, you’re worst fears come to fruition: it’s an automated voice message…but something about it catches your attention right away.

This isn’t like other AVM’s you’ve gotten in the past. Right off the bat you know that something is different.

The message specifically asked for you by name, and when you heard that the phone call was from Capital One about some potential suspicious activity on your card, your ears definitely perked up.

After a few seconds, the message asks you to verify your identity with a question only you would know the answer to before proceeding with the rest of the message.

After verifying who you were, details about the suspicious transaction are presented to you.

After thinking about it for a second, you don’t at first recognize the charge, and as an option, ask to speak to a customer service representative.

In less time than it takes you to say “customer service”, someone is on the line with your full details ready to explain more about the potential fraudulent activity on your account.

You are impressed by not only the speed of the transfer to an agent, but also with the depth and responsiveness of the entire call and how seamless it was.

This time at least, you are certainly glad you picked up the phone!

So who’s behind this nifty technology? How can we invest in the growing trend of automating customer contact, bill payment, debt collection and customer service?

I’ve discovered a small company that just came public operating in this niche with nice growth prospects in an emerging and expanding field: SoundBite Communications (Nasdaq: SDBT)

SoundBite Communications

(Nasdaq: SDBT)
By Chris Fernandez, PeakStocks.com

Table Of Contents:

1. Quick Take
2. About The Company
   1. SoundBite – Automated Customer Contact Solutions
   2. SoundBite’s Competitive Advantages
   3. Business Outlook
      1. Where is SoundBite Headed
      2. Industry Outlook
   4. Competitors
   5. Management
   6. Insider/Institutional Ownership
3. Financial Performance
   1. Selected Financial Data
   2. Margin Trends
   3. Valuation Metrics
      1. Discounted Cash Flow Analysis (DCF)
      2. P/S Ratio
      3. EV/S Ratio
      4. P/E Ratio
      5. PEG Ratio
      6. Other Metrics
4. Potential Risks
5. Why I Invested in the Company
6. Bottom Line

I. Quick Take

Note: Updated through the Q3/2007 (September 31, 2007) reporting period. To get up-to-the-minute reports on SoundBite, click here.

• Download the PDF of this research report (330 KB)

*Variables You Should Know About SoundBite Communications (Nasdaq: SDBT)
The Company:	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.
Why Buy Now:	Established Large Player/Customer Base Fantastic, Highly Scalable Technology Huge Growth In an Expanding and Rapidly Developing Market Downside Protection In Recessionary Climate New Company on the Precipice of Fundamental Breakout Fantastic Stock Price as a Result of Pre-IPO Patent Letter, Market Overreaction Largely Underfollowed Stock High Margin Business Multiple Revenue Streams Large Insider Ownership (60+%)
Market Cap:	$82.5
Revenue (2007):	$40
Cash/Debt:	$30 / $0
Current Price:	$5.50
Risk Rating (?):	7.5 (Moderate-High)
Position Size (?):	1/4 (2-1-08), 1/2 (2-13-08)
Buy Around Price (?):	$6.00 (2-1-08), $5.50 (2-13-08)

*As of 2-13-08. Except share price, all values in millions.

Quick Take:

The methodologies and techniques that I adhere to are designed to increase the chances that we find that special “10-bagger” stock and ride those gains to unprecedented returns in our portfolio.

Part of that thesis is patience, diligence and prudent risk taking.

We pounce while others are either scared, don’t know about the company we are investing in, or both.

Furthermore, when analyzing potential companies for inclusion into the PeakStocks.com portfolio, I also look for risk/reward scenarios that favor us in such a way as to minimize our downside risk, and allow us a cushion should the thesis take more time than planned to play out, while simultaneously protecting our portfolio.

If there was ever a time when all of these elements have presented themselves, it’s with SoundBite Communications.

It’s not inconceivable that SoundBite could very well double in price within 1-2 years as more and more analysts and fundies begin “discovering” this great company.

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II. About The Company

SoundBite Communications – Automated Customer Contact Solutions

You’re phone is ringing again…should you pick it up?

“I dunno…” you say to yourself, “could be telemarketers bugging me again.”

As the phone continues to ring, you decide to finally pick up the phone and answer it.

Sure enough, you’re worst fears come to fruition: it’s an automated voice message…but something about it catches your attention right away.

This isn’t like other AVM’s you’ve gotten in the past. Right off the bat you know that something is different.

The message specifically asked for you by name, and when you heard that the phone call was from Capital One about some potential suspicious activity on your card, your ears definitely perked up.

After a few seconds, the message asks you to verify your identity with a question only you would know the answer to before proceeding with the rest of the message.

After verifying who you were, details about the suspicious transaction are presented to you.

After thinking about it for a second, you don’t at first recognize the charge, and as an option, ask to speak to a customer service representative.

In less time than it takes you to say “customer service”, someone is on the line with your full details ready to explain more about the potential fraudulent activity on your account.

You are impressed by not only the speed of the transfer to an agent, but also with the depth and responsiveness of the entire call and how seamless it was.

This time at least, you are certainly glad you picked up the phone!

So who’s behind this nifty technology? How can we invest in the growing trend of automating customer contact, bill payment, debt collection and customer service?

I’ve discovered a small company that just came public operating in this niche with nice growth prospects in an emerging and expanding field: SoundBite Communications (Nasdaq: SDBT)

How Does SoundBite Work?

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.

In addition, SoundBite can either create these campaigns for their customers including recording the messages with voice talent, and writing and implementing the scripts and keeping track of the analytics, or customers can choose to manage and create their own campaigns through SoundBite’s web-interface on their own.

Here are some examples of what SoundBite can do for a company:

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

http://www.soundbite.com/files/103

SoundBite’s 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 250 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 an 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 companies don’t have to purchase equipment, software, or spend any money at all on start-up costs.

A client can do everything from initiate a campaign, to collect payment and have it all tie in to their back end Point of Sale (POS) systems, Customer Relationship Management (CRM) systems or their bookkeeping and accounting systems all seamlessly and without additional cost!

This allows SoundBite to run a tight ship, keep costs low, and margins high, while adding a huge value-added service to the clients that they manage in that they don’t have to worry about trying to reconcile their campaigns with the systems that they currently have in place.

SoundBite makes everything easy and integrates it right from the start.

This doesn’t even include powerful analytics that SoundBite uses like Real-Time reporting, and the ability for companies to create a special in-bound only number using a temporary toll free number that can also measure performance of a certain campaign and change it on the fly.

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What Can SoundBite’s Technology Do?

The possibilities are almost endless. Here’s a breakdown of how SoundBite’s technology can help a company stay on top of their business and enhance profitability and sales:

• Deliver timely, high quality voice messages to large volumes of customers in a cost-effective manner.
• Messages can be alert-based or interactive with the option to Direct Connect to a live agent, or an agentless transaction can be conducted.
• Improve the response rates by using automated voice messaging as a substitute for, or a supplement to, existing communication methods.
• Increase revenue, enhance customer service and retention, and secure payments in a more timely fashion.
• Increase the productivity of call center agents by turning cold, outbound calls into warm, inbound calls.
• Reduce operational costs with an approach that is less expensive than other modes of communication and can be implemented in a much shorter time frame.

Further, SoundBite’s on-demand automated voice messaging solutions enable organizations to achieve their customer communications goals in a cost-effective, efficient manner through the delivery of automated, professionally recorded voice messages.

Most organizations use call centers for these purposes, but they are inherently fraught with inefficiencies such as: higher costs due to labor and training, limited capacity of agents to call customers, limited productivity due to time wasted leaving voice messages, connecting to the wrong person or getting busy signals, and quality control as the turnover ratio in call centers is extremely high.

In addition, some organizations use Interactive Voice Response (IVR) systems and predictive dialers that also have significant drawbacks.

For example, predictive dialers have significant up-front costs and leave the recipient hanging via what is known as “dialer pause” that occurs when a predictive dialer locates an available agent, and finally, predictive dialers often fail to detect answering machines correctly.

SoundBite’s solutions are used for a variety of collections, customer care, and marketing processes and help organizations to increase revenue, enhance customer service and retention, and secure payments by improving customer contact processes.

SoundBite offers flexibility in messaging and scripting options, including:

Also, just in case you were wondering, right-party verification is used to make sure that the person on the other end of the phone call is the one that SoundBite’s clients want to talk to. By asking certain questions that only the “right-party” would know, SoundBite can eliminate wasted phone calls and costs associated with getting the wrong person on the phone.

Furthermore, SoundBite’s solutions offer some key differentiating characteristics that make it more appealing than either predictive dialers or other IVR solutions.

Some of these benefits include: virtually no cost of ownership, improved contact center agent productivity (their time is spent talking to customers, not calling them), enhanced agentless interactions (bill paying, answering your own queries about balances, etc.), burstable capacity (making more calls during peak calling times), rapidly deployable campaigns and modifications, and a usage-based pricing model.

Here are a few examples of how SoundBite’s technology can be used in various customer campaigns:

• Account Activations: (Phone Service, Cable)
• Fraud Alerts: (Credit Cards, Banks)
• Appointment Confirmations: (Cable Installation)
• Loan Processing Status
• Automated Payments: (Late Payments, Upgrade Services, etc.)
• Loyalty/Rewards Programs
• Billing Updates
• Payment Reminders
• Collections: (early and late stage debt)
• Scheduled Service Outages: (Electric Company, etc.)
• Claim Status
• Contract Renewals
• Subscription Renewals
• Credit Card Activations
• Surveys
• Welcome Calls
• Delivery Notifications: (UPS Package, etc.)
• Winbacks: (To try and retain customers after they closed an account)

I don’t know about you, but when I see all the applications of this technology, it really opens my eyes to the possibilities within the industry and SoundBite in particular.

If you can dream of an idea that can reduce your overhead and keep you in contact with your customers, SoundBite can make it happen.

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Who’s Using SoundBite’s Technology?

SoundBite is currently being deployed in the following industries:

• 3rd Party Collections
• Automobile Financing
• Banking
• Credit Cards
• Credit Unions
• Healthcare
• Insurance
• Media
• Retail
• Telecom
• Utilities

Name virtually any business that interacts with a customer, and SoundBite can help that company save costs, keep in touch with customers, and increase sales and conversions via SoundBite’s technology.

SoundBite’s Current List of Clients

Companies across a wide range of industries have improved the effectiveness of their customer contact programs with SoundBite.

More than 250 organizations rely on SoundBite to initiate and manage customer contact campaigns across a variety of collections, customer care, and marketing processes.

SoundBite is a dominant player in their field, with a large client base that includes 14 of the 20 largest debt collection agencies (based on 2006 revenue), 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!

Some of their other customers include: Lifeline Medical Alert Service, The Wall Street Journal, Capital One and many other companies across a broad spectrum of industries and sectors that include loan origination, retail applications, credit card activation and more.

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SoundBite’s Competitive Advantages

• Top 2 Player in Their Industry/Cash Rich Balance Sheet: SoundBite is in the top 2 within their industry in terms of total sales and projected growth. In addition, SoundBite is the only publicly traded company within this niche, and therefore, the best funded going forward with a huge hoard of cash and no debt on the balance sheet.

This cash rich position, as well as their ability to tap into the equity markets further if they so choose, allows them to pursue acquisitions and expand their business further.

• Impressive Roster of Customers: SoundBite lists 14 of the top 20 collections agencies by sales among their customers. In addition their roster of customers outside of the collections industry include The Wall Street Journal, T-Mobile, AT&T, Public Utility companies and many others.

The value added services that SoundBite offers to their current roster of clients goes a long way towards securing new business and validating not only their technology, but also their reputation, customer service and product solutions.

• Better Sales When Economy Declines: 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 current credit market turmoil and corresponding housing decline and recession fears plays right into the hands of additional collection needs.

Even when the economy does turn around, that’s when people start paying off their debts again, so a downturn in the economy will provide a boost for SoundBite not just in the immediate future but also for a sustained period of time.

• 98% Accuracy for Detecting Answering Machines: SoundBite has a patented algorithm that is 98% accurate in determining whether the response on the other end of the phone is an answering machine or a live person.

When they do detect an answering machine, SoundBite’s algorithms also know when the message playing is over and when to begin playing their recorded message should their client wish to leave a message.

This is very critical for their clients that need to leave time-sensitive messages for their customers, and need the message played in its entirety.

Along those same lines, for clients that DON’T want to leave a message, detecting that an answering machine has picked up is important for terminating the call and saving money.

• No Delay In Answering Callers Like Predictive Dialers: Along the same lines as the answering machine technology, is SoundBite’s ability to connect the person answering the phone with a live customer service representative with virtually no delay.

I’m sure we’ve all gotten the calls where we say “hello…” and here this eerie silence on the other end before someone comes on the phone and mispronounces our name, and we know we are caught.

This is known as “dialer pause”, and is a killer for the clients that use this type of service.

With SoundBite’s technology, there is no delay, thus enhancing the ability to reach a live person, and increase sales, leads and conversion for SoundBite’s clients.

• Software as a Service (SaaS) Model: Using SoundBite’s on-demand technology, a company can deploy and initiate their first campaign in a matter of days without installing any software, hardware, or making any other capital expenditures.

Everything is done via the Internet, and SoundBite will even customize portions of the interface to be able to import customer data, and export data to tie into their client’s back-end systems including Point of Sale (POS), accounting, bookkeeping and Customer Relationship Management (CRM) products.

This allows potential clients to test out SoundBite’s services on a small portion of their customer base before they move forward with a full-scale campaign, and when/if they do decide to move forward, SoundBite can scale the system and overlap it with whatever the client is currently using to make any transition, importing of data, exporting of data, or reconciliation of data smooth and seamless.

In addition, SoundBite’s model is highly scalable, and they are switching their entire backbone to a VoIP system that will make it easier for them to enter overseas markets in a cost-effective manner. This transition should be completed within the next 6 months.

• Wide Array of Product Offerings: From real time payment, to right-party verification, to all sorts of AVM products, SoundBite offers their clients a one-stop-shop for any customer relation offering they might require.

This even includes the ability to use different numbers to call from so that when you look at your caller ID, the same number will not show up twice, with the number even looking as if the call is from a local number.

Sneaky to be sure, but for the types of services that SoundBite’s customers need, a necessity nonetheless.

Another of these services is agentless interactions. Companies can lower their costs and outsource some of their customer relationship interactions by using SoundBite’s AVM solutions. For example automated subscription renewals or overdue credit card payments can be facilitated without agent intervention.

• Usage-Based Pricing Model: Prices for usage are calculated on a per-minute or per-message basis. This limits the risk for companies using SoundBite, and is great in that is forces SoundBite to work hard to retain that client to make sure they are happy. This is sort of a built-in incentive system.

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Business Outlook

SoundBite makes money by providing their service under a usage-based pricing model, with prices calculated on a per-minute or per-message basis.

The amount that SoundBite charges for AVM calls varies based upon whether the call is one-way, two-way, or agentless, and the total volume of calls by a client in a calendar month. The more calls a client makes the better.

Clients used SoundBite’s technology to place 1.5 BILLION calls in 2007, and their service currently has the ability to initiate more than 14 million calls each day.

To this end, SoundBite is trying to become the de-facto leader in on-demand AVM customer contact solutions.

Their IPO and continued success in implementing customer requests and expanding their business into other fields besides collections, has me confident this is a real possibility, especially in light of their competitive advantages mentioned above.

SoundBite will continue to expand into new areas, like SMS (text messaging) solutions, expanding to overseas markets, selectively pursue strategic acquisitions and relationships, and build upon their success with their current customers in collections and customer service to leverage their business model going forward.

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Where is SoundBite Headed?

SoundBite operates in a rapidly growing marketplace that is expected to grow over 30% annually for the foreseeable future.

The needs of this industry are varied and recursive, and therefore offer a great way of attaining perpetual growth and recurring revenue.

Apart from the collections industry (which makes up the majority of SoundBite’s business), other businesses are finding that staying in touch with their customers and taking care of transactions via an AVM system without having to involve customer service reps, is not only advantageous in terms of total cost savings, but more so in terms of expanding their business operations and tapping into a ready-made customer base that is willing and receptive to up-selling opportunities and other “call-to-action” campaigns that expand the bottom line in a cost effective and timely manner.

Just think about the broad spectrum of industries that can use SoundBite for ANY purpose whatsoever that has to do with customer contact, retention and verification.

Here are some additional possibilities for SoundBite’s technology:

• Government Usage: Think about the IRS using SoundBite to initiate calls for payment notifications, past due taxes, or other governmental announcements like disaster notifications.
• Local Municipal Usage: This could include your local city/county calling to alert you to a school closing due to weather, updates on local street closings, fire warnings, and anything in between.
• Other Local Agencies, Schools and Businesses: Any other local agency, school or business like a local pizza chain that blasts out a special for that day only, and when you press “1” to speak to someone, automatically connects you to the nearest location.
• As Yet-Unknown Business Opportunities: SoundBite will be adding new features like SMS (Text Messaging) and other services that will appeal to a broad spectrum of local, national and Internet-only businesses that want to get a message out their customers quickly and efficiently.
• Any Other of a Myriad of Applications: Things that I can’t even think about yet that are practical and feasible. Use your imagination and the possibilities are endless.

As a result of SoundBite’s current products as well as yet-unknown products, I believe we are on the cusp of a growing, and just-turned-profitable business that can be a core holding for years to come based on not just what they are currently doing, but more for what they can and will do, and the growth within their industry.

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Industry Outlook

The market for AVM solutions is growing rapidly and is only going to continue to grow, as the cost benefits of AVM solutions present themselves, the product offerings become more robust and targeted, and the deployment of these solutions increases both productivity and the bottom line for the companies involved.

SoundBite estimates that 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%.

Right now SoundBite has about 6-7% of the market share if you go by total sales figures alone.

If we take that out for the next 3 years, SoundBite will get about $100 million in sales from this segment alone, assuming no gain in market share, representing a 30% CAGR. Not bad for a small company.

However, I believe as SoundBite enters new markets, expands their business either through acquisitions and/or expanded product offerings, and takes more market share, this figure will be much higher, representing a huge upside potential for SoundBite’s shares at their current price.

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Competitors

The AVM market is highly competitive and will remain so going forward.

SoundBite has many competitive advantages as I already discussed, but this doesn’t stop anyone from trying to compete with SoundBite if they really want to. This includes some large players that aren’t even in their business niche yet like large phone companies and other communications companies.

However, as we’ve seen with other industries, although it might not at first appear that there are high barriers to entry, and initially there might not be, intrinsically, there are large structural and competitive advantages that a seasoned best-in-breed player already has in place, that an upstart, or incumbent will take years to learn and/or master if ever.

Some of the technologies and companies that SoundBite competes against include:

• Predictive Dialers: Previously, the market for AVM technology was purely delivered via predictive dialers. The vast majority of AVM call technology is delivered via predictive dialers through vendors such as Avaya, Aspect and many similar smaller companies.

Some of these vendors offer this technology as a hosted application, instead of requiring capital purchase of these systems, thus eliminating one of SoundBite’s cost-advantages.

For the companies that have purchased their predictive dialers, many of them are likely to continue to use them because of this cost and the familiarity with them.

• Hosted AVM Solutions: This space represents SoundBite’s direct competition and includes companies that are willing to compete more on price and receive a larger volume of calls using their systems.

Further, most of their competition in this space consists of a number of smaller privately held companies and a few larger companies that offer AVM services as a part of a larger suite of services. In other words, it’s not their primary competitive space or competency, but an added service they offer their customers. One of these companies is Premier Global Services, Inc. (NYSE: PGI).

This space is then broken down into 2 sectors: 1st party space and 3rd party space.

The 1st party space is made up of companies that use AVM services to directly correspond to customers for their collections and customer retention needs. This includes in-house collections departments at a bank, telephone company, or the abovementioned T-mobile or Capital One campaigns that are all initiated in-house.

Typically, these competitors differentiate their products by offering a broader array of features, and compete on the basis of return on investment rather than price.

Their primary competitor in this space is Varolii Corp., a private company.

The 3rd party space is made up of companies that use AVM services to collect money or offer other programs for customer retention needs on behalf of the companies they represent.

SoundBite competes more on price with other 3rd party providers since this is more of a bottom line business with most of their customers being collections agencies.

The primary competition in this space is via LiveVox and Global Connect, both private companies.

Bottom Line: Competition abounds on all sides.

According to SoundBite, there are fewer than 20 privately held companies that compete with them in this space, in addition to the publicly traded ones mentioned above. Consolidation is a natural by-product of this fragmentation.

Furthermore, SoundBite believes, as do I, that the technical barriers to entry, as well as the effort to gain traction in this market preclude someone from just setting up shop and opening their doors for business without first acquiring the technology from one of these companies, which has already happened and will continue to happen.

SoundBite is among the leaders in their field with a proven, cost-effective and well-known technology, and they are firmly entrenched as the incumbents, but as we’ve seen in other business segments, like search engines, being the biggest and best now means nothing when an upstart comes knocking at your door and erodes your market dominance.

That being said, I believe that SoundBite is in a great place to not only grow their market share at the expense of these other players, but also to potentially acquire some of their fiercest competitors because of their better funding, or even get bought out by another company that is looking to enter this market.

You never compete in a vacuum and such is the case with the AVM market, but I believe SoundBite is well positioned to remain at the top, and further expand their market share going forward, not to mention the fact that the whole segment is growing at a phenomenal clip.

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Management

Here’s a brief rundown of SoundBite’s management from their prospectus:

Executive Officers and Directors

“The following table sets forth information regarding our executive officers and directors as of August 15, 2007:

Peter R. Shields has served as one of our directors and our Chief Executive Officer and President since May 2004. He served as our President from August 2003 to May 2004. From December 2002 to March 2003, Mr. Shields served as Chief Operating Officer of Adesso Systems, Inc., a provider of mobile enterprise software and services. From March 2002 to November 2002, he served as Chief Executive Officer and President of Tilion, Inc., a provider of Internet-based event management solutions that merged with SynQuest, Inc. and Viewlocity, Inc. in September 2002.

Robert C. Leahy has served as our Chief Operating Officer since September 2006 and as our Chief Financial Officer since February 2007. From 1987 to October 2005, Mr. Leahy served as Vice President Finance and Operations and Chief Financial Officer of Brooktrout, Inc., a NASDAQ-listed developer of software and hardware platforms that was acquired by EAS Group, Inc. in October 2005.

Timothy R. Segall has served as our Chief Technology Officer since January 2002. From June 2000 to December 2006, Mr. Segall served as our Vice President, Engineering.

Richard M. Underwood has served as our Executive Vice President, Worldwide Sales since June 2005. Mr. Underwood served as Vice President, Sales of PanGo Networks, a provider of location management and asset tracking solutions, from October 2004 to May 2005. From 1997 to February 2004, Mr. Underwood served as Executive Vice President for Worldwide Sales of Moldflow Corp., a NASDAQ-listed provider of software and hardware solutions for plastics-focused manufacturing.

Andrew R. Gilbert has served as our Vice President, Operations since April 2005. From August 2000 to April 2005, he served as one of our Senior Engineers.

Christopher A. Hemme has served as our Vice President of Finance, Treasurer and Secretary from February 2007 to the present. He served as our Chief Financial Officer, Treasurer and Secretary from July 2005 to February 2007, and as our Vice President of Finance from February 2004 to July 2005. From December 1999 to November 2003, Mr. Hemme served as the Corporate Controller of Winphoria Networks, Inc., a provider of core infrastructure for wireless networks that was acquired by Motorola in May 2003.

Noreen L. Henrich has served as our Vice President, Client Management since October 2005. From January 2004 to September 2005, she served as Vice President, Professional Services of Pragmatech Software, a provider of on-demand sales knowledge solutions. From 1998 to July 2003, she served as Regional Vice President of NASDAQ-listed Oracle Corporation, a developer of database management systems.

Eric R. Giler has served as one of our directors since December 2005. Mr. Giler has been the Chairman and Chief Executive Officer of Groove Mobile, a provider of mobile music commerce platforms, since April 2006. From 1984 to October 2005, Mr. Giler served as Chief Executive Officer and President of Brooktrout, Inc., a NASDAQ-listed provider of software and hardware platforms that was acquired by EAS Group, Inc. in October 2005.

James A. Goldstein has served as one of our directors since 2000. Since 2001 Mr. Goldstein has been a General Partner of North Bridge Venture Partners, a venture capital firm that he joined in 1998.

Vernon F. Lobo has served as one of our directors since 2000. Since 1997, Mr. Lobo has served as a Managing Director of Mosaic Venture Partners, a venture capital firm.

Justin J. Perreault has served as one of our directors since June 2005. Since 1999, Mr. Perreault has been a General Partner of Commonwealth Capital Ventures, a venture capital firm.

James J. Roszkowski has served as one of our directors since March 2006. Since April 2005, Mr. Roszkowski has served as a Principal of the Owl’s Nest Group, LLC, an advisory and consulting firm. Mr. Roszkowski held the position of Senior Executive Vice President of MBNA America Bank, N.A., a New York Stock Exchange-listed independent credit card issuer, from 1989 to April 2005.

Regina O. Sommer has served as one of our directors since December 2006. From January 2002 until March 2005, Ms. Sommer served as Vice President and Chief Financial Officer of Netegrity, Inc., a NASDAQ-listed provider of security software solutions that was acquired by Computer Associates International, Inc. in November 2004. Ms. Sommer also serves on the board of directors of Wright Express Corporation, a New York Stock Exchange-listed provider of payment processing and information management services.

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Insider/Institutional Ownership

Insider Ownership:

It’s always a good idea to make sure that the owner’s interests are aligned with yours. So let’s take a look at the insider ownership for SoundBite.

According to the company’s prospectus, Executive Officers and Directors owned about 60.7% of the company’s shares after the close of their IPO.

CEO Peter Shields owns about 4.3% of the shares outstanding after the close of the IPO.

CTO Timothy R. Segall owns about 1.7% of the company, and is one of the last remaining founders with the company. Other high level management was brought in when SoundBite received further rounds of funding.

The large majority of the shares, over 55%, are owned via the directors and their venture capital vehicles.

This is a large roster of “insiders” that own the stock, although I would like to see more ownership via the founders and/or the CEO/CFO/CTO.

But either way, the insiders’ interests are aligned with our own because they own such a large chunk of the company, and certainly want to get a higher return on their investment.

Institutional Ownership:

Institutions own a small amount of SoundBite’s shares.

Since most insiders and 5% beneficial owners account for over 60% of the total shares outstanding, there isn’t much stock to go around, thus explaining SoundBite’s low volume and float.

There are a few funds that own SoundBite right now, but only small stakes, that account for about 5% total ownership.

To me this is great news as SoundBite is the quintessential undiscovered company to the rest of Wall Street.

Most of the 5%+ stockholders that do own SoundBite’s shares are original investors in the company that helped to fund its operations and start-up costs

I believe these stake holders represent a more solid and stable share base than traditional funds because they are original investors in the company, and not looking to profit from SoundBite’s share price the first chance they get.

Either way you slice it, institutional ownership is still low enough for us to take advantage of an “undiscovered” name that most funds don’t or can’t own.

This is always something to keep an eye on as heavy institutional ownership can move the stock one way or another rather quickly.

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III. Financial Performance

Selected Financial Data

SoundBite has been profitable intermittently throughout their existence. The last few years, as they experienced rapid growth in sales, and put more capital to work hiring a larger sales force and building out their infrastructure, their costs have kept pace, and accelerated beyond the previous years, leading to negative profit numbers and overall lumpiness in their earnings.

Also, SoundBite has been cash flow positive for the last 3 years and counting, and are about to become free cash flow positive as we enter fiscal 2008.

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.

Sales/Income/EPS/Cash Flow
3-Year Comparison, 1-Year Estimate: (In Millions, except EPS):

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

The interesting thing to note when looking at these trends is that SoundBite’s top line is projected to grow about 34% this year (2007) and 34% 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.

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

Also, for 2007 SoundBite is expected to show a positive EPS, and also be cash flow positive to the tune of about $2.5 million dollars, with a break-even showing on a free cash flow basis.

You can see the cash flow trends for the last 3 years up to and including SoundBite’s 3rd quarter reporting period, which shows a huge cash flow improvement over the previous years.

Also, 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.

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 (3Q/2007) on November 13th, 2007:

Sales/Income/EPS/Cash Flow
Q3/2006 vs. Q3/2007 Comparison (In Millions, except EPS):

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.

Expect next quarter’s growth across the board to outpace this quarter.

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

Finally, share count does not yet reflect their IPO.

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Margin Trends

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.

3-Year Margin Trends and Outlook Table:

At first glance it would appear that SoundBite’s margins are deteriorating, but remember that their margins are lumpy, and the last column only includes results up to and including their Q3 reporting period.

Once the Q4 reporting period is added to the mix, the margins will rise because that is traditionally their best quarter of the year in terms of sales and margins.

Also, according to their last earnings release, SoundBite is targeting a long-term gross margin in the range of 63-65%, so it appears they will stabilize their cost of sales going forward.

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

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Last 6-Quarter Margin Trends:

SoundBite’s margins are indeed lumpy, as are their sales. This is definitely one of the risks associated with investing in their stock.

Traditionally, the 4th quarter is their best on the revenue and margin side and you can see that’s the case here, with the exception of Q2/2006.

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 63-65%, 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.

The way I see it, it’s fine for a company to take a temporary hit to margins, 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 Metrics

(Note: Valuation metrics calculated using $6.00 share price. Please adjust accordingly.)

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.

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 $12-14 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!

SoundBite has a limited operating history, and as such traditional valuation metrics that deal with cash flow, and profitability are not applicable in this case, or less so than a more seasoned company, therefore, putting a firm valuation on SoundBite is an art more than a science.

In light of this, I have chosen the following metrics for valuation purposes for SoundBite:

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

Let’s start with the Discounted Cash Flow Analysis (DCF):

DCF is often called the king of all valuation metrics because it measures a company’s actual ability to generate cash from operations, and in the end, that’s all that really matters.

Other metrics like P/E ratios and EPS ratios, can be manipulated by the company or not lead to a truthful analysis of the business because of accounting shenanigans, but DCF can’t be made up. You are either making and retaining cash, or you aren’t, simple as that.

When assessing a company’s “fair” or intrinsic value using a DCF analysis, many assumptions must be made, especially if a company has negative cash flows or earnings before interest and taxes.

Oftentimes, using a DCF analysis takes into account many future variables, including when the company will actually turn a profit, and that profit’s rate of growth going forward.

Everything from the potential growth prospects of the company’s earnings, to their tax rate, overall market’s return, risk free rate of return for bonds, their debt ratio, etc is included when analyzing DFC which is why you can get wild fluctuations not only from doing the calculations yourself, but also when comparing one investor or analyst’s numbers to another.

In other words, using this type of analysis is far from an exact science because you need to make assumptions for the next 5-10 years that may or may not EVER come true.

For instance, a Price-to-Sales (P/S) ratio can be measured in absolute terms: The company’s market cap on that day, divided by their total sales. Easy, simple, clean and exact.

However, with a DCF analysis, there are many variables that need to be accounted for that can change in an instant.

Why do we use this analysis tool then? Because it is one of the most definitive measures of a company’s worth if we look into the future and determine what it can earn for the next 5-10 years and ultimately, beyond.

This analysis gives us a “terminal” value of the shares, and what they are worth right now, based on all our assumptions.

This is also commonly referred to as the intrinsic value of the stock, or it’s absolute highest value based on all our assumptions.

When using this modeling, I typically account for 3 scenarios:

1) The best-case scenario: This scenario typically assumes the highest growth rates, margins and cash flow, and also assumes the lowest volatility, tax rate, debt levels, etc. for the company you are analyzing.

2) A middle scenario which is the most likely, with moderate assumptions on growth rates, margins, cash-flow, volatility, tax rates, debt levels, etc.

3) The worst-case scenario: This scenario typically assumes the lowest growth rates and margins, and also assumes the highest volatility, tax rate, etc. for the company you are analyzing.

I won’t go into detail on how this is done, but suffice it to say there are calculators on the web that can do DCF, as well as proprietary spreadsheets and systems that all financial firms use.

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

- Best Case Scenario: SoundBite’s shares are valued at anywhere from $14.50 - $17.18 per share ($15.85 average)

- Middle Scenario: SoundBite’s shares are valued at anywhere from $10.75 - $12.23 per share. ($11.49 average)

- Worst-Case Scenario: SoundBite’s shares are valued at anywhere from $7.72 - $8.33 per share ($8.03 average)

So using this measure of valuing a company, I get an average share price range from: $8.03 - $15.85, taking the midline of each scenario.

With SoundBite’s shares trading at about $6.00 as of this writing, even under the worst-case scenario (and with some horrible growth numbers in there that are below what SoundBite is tracking for next year) shares are way undervalued.

More to the point, I believe the midline model is most accurate because it is conservative, while being realistic with growth rates and assumptions made about acquisitions, organic growth, tax rates, market volatility and diluted share count.

Using this metric, SoundBite’s share value is trading way below its intrinsic value of about $12.00 per share.

Now, of course, DCF can’t be used on it’s own, especially in light of the fact that SoundBite has no track record for profitability, and needs to be used along with other measures of value, so to that end, I have detailed some more valuation metrics below that are more traditional.

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Traditional Metrics:

To make things easier, I have created a table that includes all of SoundBite’s valuation metrics vs. a few comparable companies that are public, as well as their industry, which is the Software and Programming industry.

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.

SoundBite competes more as a software company, specifically a SaaS company, than a traditional software developer or enterprise software company. Therefore, I believe that SoundBite’s valuation should match those of other SaaS companies such as Salesforce.com, and other companies that provide customer contact solutions and automation for keeping in touch with customers either for customer service applications, or to collect payment.

So, to that end, I included the following companies that are in the same industry, and also compete with the same type of technology and business models as SoundBite. These companies include:

- SalesForce.com (NYSE: CRM): Is a leading provider of on-demand (SaaS) customer relationship management (CRM) services to businesses and industries worldwide.

- LivePerson (Nasdaq: LPSN): Is a leader in hosted solutions that manage communications, including live chat, voice, email, self-service, and telephone logs from a single platform.

- Nuance Communications (Nasdaq: NUAN): Nuance offers speech-based solutions for businesses and primarily delivers a portfolio of speech-enabled customer care solutions that enhance customer communications and automate customer services and business processes.

Remember that all valuation metrics for SoundBite are calculated using a $6.00 per share value.

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Price to Sales Ratio (P/S):

Since SoundBite is a young company, traditional metrics that involve cash-flow, earnings, etc., are not as applicable at this stage of the game (and why we can get shares for cheap), as other metrics such as Price to Sales (P/S), and Enterprise Value to Sales (EV/S).

Because I believe that these metrics are more relevant to our story at this point, I am weighting them more heavily in terms of their importance to the share price of SoundBite.

That being said, if you look at the table above, you’ll see that for the trailing 12 months, SoundBite’s P/S ratio is only 2.3, compared to the 5.4 for the overall Software and Programming industry.

If you take a more specific look at each company that I have provided for comparison sake, you’ll see that SoundBite is even more undervalued, by at least 2-3 times. In other words, SoundBite trades at about a 50% discount to its peers in terms of the P/S ratio.

Some of this discrepancy can be attributed to their growth rate being slower than some of those comparable companies, but it is still faster than the overall industry, and when paying for a company, you are paying for what it will do in the future, not what it has done in the past.

To that end, SoundBite’s growth targets are actually accelerating, not decelerating, while some of the other companies and the overall industry is seeing decreased sales growth, so again, SoundBite deserves a premium because of this sustainability and improving top line.

Bottom Line: Fast growing companies always deserve a higher multiple than slower growing companies. Even if SoundBite’s growth is equal to the rest of the companies listed in this table because SoundBite’s growth is accelerating and the rest are decelerating, I believe that SoundBite’s shares are trading at a discount to this growth using the P/S metric by about 100%.

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Enterprise Value to Sales Ratio (EV/S):

On the same token as the P/S ratio above, if we take into account SoundBite’s cash on the balance sheet, and the fact that they have no debt, they are trading at a steep discount when that is taken into account.

The enterprise value of a company is useful when determining the true “worth” of that company when all cash and debt are taken into account.

To get that ratio, you merely take the market cap of that company, add the total cash and cash equivalents, and subtract all debt. The resulting number is the Enterprise Value (EV).

SoundBite’s enterprise value is an amazingly cheap $60 million. In fact, SoundBite is so well capitalized that they have about $2.00 per share in cash in their coffers!

That represents about 1/3 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.

In addition, if we take into account where SoundBite stands compared to its industry and peers, there is a large discrepancy here as well.

In fact, SoundBite is trading about 200%-500% BELOW where they should be by this metric.

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.

Bottom Line: SoundBite is trading at a steep discount to its peers and industry group using the EV/S metric. According to my calculations, SoundBite is trading at a minimum of a 200-300% discount to where it should be.

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Price to Earnings Ratio (P/E):

SoundBite just started earning a profit.

For the just ended fiscal year of 2007, analysts were expecting them to earn about $.05 per share.

Analysts are pegging their earnings to be about $.13 per share in 2008 and $.24 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 25.

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 overvalued and rich, but again, a fast growing company (the average growth in their 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.

Using the projected 2009 figures makes SoundBite’s shares look much more reasonable, but 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.

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Price to Earnings Divided by Growth (PEG):

The last number that I would like to use is what’s called the PEG multiple.

This takes into account the Price to Earnings (P/E), divided by the growth in percentage terms. So if a company has a forward P/E of 60, and they are growing their earnings by 60% per year, then their PEG ratio is 1.

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 $.13 per share over about $.05 this year.

Assuming SoundBite earns $.13 this year and grows to $.24 next year, this would yield a growth rate of over 84%. Taking the forward P/E ratios from above, we get:

PEG (2008) = (46/84) = .547

Obviously this number is ridiculous and is not justifiable because since SoundBite just started earning a profit, these sorts of metrics are way out of whack. This is why these kinds of companies are extremely hard to value in their early stages (and why we can profit from this discrepancy).

Analysts and other investors are using their “best guesses” to estimate FUTURE earnings potential, and thus assign all kinds of crazy numbers and multiples to come up with what a “fair” price for the stock is.

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.

However, here’s the catch: when using the PEG ratio, the calculation is usually taken out for 3-5 years. In other words, sure SoundBite’s growth is absolutely stunning when looked at what COULD happen over the next 2 years or so, but what happens after that when year over year comparisons are harder to make?

Well, if we look at the analyst’s expectations for this company (and to be honest I think they are conservative), they are giving SoundBite a forward growth estimate of 35%.

That changes things.

Hmm…doesn’t look like such a screaming bargain now does it?

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 look into 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.

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Other Valuation Metrics

I could go on and on with different valuation metrics, but I tried to stick to the most tried-and-true ones above.

Because we are at a disadvantage (or extreme advantage depending on how you want to look at it!) when trying to pin down a valuation for SoundBite, using traditional valuation techniques is difficult and an exercise in art more than science.

There are tons of other metrics that I could have used to further bolster my case for SoundBite: things like EBIDTA to cash flow, cash flow to sales, and the list goes on and on.

But to keep things simple, and because of a lack of historical and solid data to work with, every other valuation metric would present such a reach in the dark, that I would be basically wasting our time.

The reasonable way to do this is to take a few mainstream valuation techniques, as I have done above, and then once assured that the shares aren’t in another atmosphere, base your investment thesis on the underlying business and growth prospects, because in the end, everything else will come to fruition if the business itself is being managed in a healthy and prosperous way and fundamentals continue to improve.

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IV. Potential Risks

• Patent Infringement Status: A few days before SoundBite was set to go public (at $12-14 per share) SoundBite Received a letter from Universal Recovery Systems (URS), that URS thought they might infringe on an existing patent and the belief that they might also potentially infringe on an as-yet unapproved patent application.

The patent application hasn’t gone through any of the rigors of getting passed.

URS never actually filed suit, they just sent a letter saying that SoundBite MIGHT infringe on the current patent and the potential patent that might be issued.

Furthermore, URS then told SoundBite that they would sell that patent, as well as the application, to them and that SoundBite had 2 weeks to respond, or URS would make the same offer to a competitor.

The next day SoundBite amended their prospectus saying that they got a “short form” opinion from their lawyer stating that they believed they didn’t infringe on that current patent.

They then filed a lawsuit against URS and Blake Rice it’s CEO. SoundBite filed 4 claims with one of them being interference of their IPO.

Within 3 days, URS caved, filed a statement of non-liability saying SoundBite does NOT infringe on the issued patent in question, and never sued SoundBite.

As for the patent that has been filed, from my understanding, it is a methods patent, not a product patent and if and when it gets issued, there might be an issue, BUT because SoundBite has been doing this since 2000, they are highly skeptical of any infringement and there is no guarantee that the patent will ever see the light of day.

URS never took any legal action and there are no pending legal issues as far as SoundBite is concerned, but they are suing URS for obstructing their business, specifically their IPO

SoundBite’s business prospects were never changed from one day to the next, except for this blatant attempt by URS to extort money from SoundBite.

As a result of this claim and hoopla, SoundBite had to wait to file their IPO till November, about 2 weeks later, and had to lower their offering price to $8 per share, from the proposed $12-14.

Investors were spooked for sure, but for no good reason.

I am only listing this risk factor to help explain why their share price is lower today than the original proposed IPO price, and to be thorough in defining potential risk factors, although at this point, and with all the research that I have done, I don’t believe this will have a material impact on SoundBite ever again.

• Potential Lumpiness from Quarter to Quarter: As SoundBite’s sales grow, there should be less lumpiness in their results from quarter to quarter.

But for the time being, because of various factors that are out of their control, and because they depend on the collections market for a majority of their business, this lumpiness in their operating results might continue for the foreseeable future.

One side-effect of this lumpiness is brought about by the seasonality of the collections industry which typically sees its highest activity in the 4th quarter of each year, and its lowest in the 1st quarter.

Some other circumstances that could impact their operating results include: new customer wins, timing of orders from customers, variability in margins because of product mix, variability of expenses, seasonality and general economic conditions.

Now, while we don’t care a whole lot about fluctuations in a business from quarter to quarter so long as the long-term story remains on track, the market certainly will. As a result, expect potentially large fluctuations in SoundBite’s share price if they ever “disappoint” the Street in any one-quarter’s earnings release as a result of one-time fluctuations because of some of the factors mentioned above.

• Reliance on the Collections Industry for Majority of Revenue: SoundBite derives a significant amount of their revenue from the collections industry, and anything that adversely affects this industry will surely affect SoundBite going forward.

Revenues from the collections industry accounted for 31% of total sales in 2004, 67% in 2005, 80% in 2006 and 82% so far in 2007.

While SoundBite is starting to diversify their customer base, until that happens on a significant level, anything that happens to the collections agency industry will have a large impact on SoundBite.

Fortunately for our investment thesis at this time, with the economy entering into a possible recession, SoundBite is perfectly positioned to capitalize on the INCREASE in collections activity, but when the economy improves, this could go the other way.

• Competition: We’ve covered this extensively already, but it is a huge risk factor nonetheless.

SoundBite operates in a highly fragmented and competitive environment. Although there are barriers to entry, a well-funded and motivated entrant could quickly take market share away from SoundBite and the other AVM providers and cause a significant disruption in their business model.

• Debt Collection Codes and Laws: There are various state and federal laws that govern the collections industry and when and where someone can be called, how often they can be called, and under what circumstances they can be called.

These laws can change, and while SoundBite is not directly responsible for violations of these laws by one of their clients, it is not inconceivable that one of their clients could go “rogue” and SoundBite could be sued or come under some other penalties for violating these laws.

For instance, it is illegal to use an automatic telephone dialing system or an artificial or prerecorded message to contact any cellular or other wireless telephone number, unless the recipient has consented to receiving this type of message or is not charged for the message.

This is where things can get tricky, if for instance, one of SoundBite’s collections clients interprets the law in such a way as to assume that if a customer gave their cell phone number on a loan application that they are delinquent on, that might constitute consent sufficient to permit the agency to contact the debtor using artificial prerecord messages.

As more and more people use cell phones in place of land-line phone services, this could become problematic for SoundBite either because of potential violations, or because their services become less attractive to potential clients in the collections industry because they are unable to use them for this purpose.

Either way you slice it, this is something to keep an eye on going forward.

• No Minimum Commitments From Clients: When SoundBite enters into an agreement with a customer, they are under no obligation for minimal usage or to use SoundBite’s service on an ongoing basis.

While this could be a good thing as it allows potential customers to use SoundBite without committing large amounts of capital to test out whether SoundBite is right for them, it also can hinder SoundBite’s visibility and profitability as current clients could pull back spending on a moment’s notice and cause more unpredictability and lumpiness for SoundBite’s operating results.

In addition, because there is a lack of contractual obligation from SoundBite’s clients, they could also migrate to a competitor easily and with almost no penalty.

• Market Acceptance/New Technology: If the market for AVM solutions fails to materialize, or develops slower than anticipated, SoundBite’s financial status and business will come into question, and at the very least, their growth will slow.

Along those same lines, if SoundBite fails to develop new technology and/or the features that it’s clients want, they could lose market share or grow slower than anticipated.

• Potential Security Breaches/ Platform Malfunctions: SoundBite utilizes a VoIP network for their calling backbone, as well as 3rd party applications and products to power their network and calling solutions.

If they were to experience any significant delay, outage or disruption in that service, or if their customer’s data were to be compromised in any way (think of all the phone numbers in their database), it could inhibit their ability to gain new customers and reassure the customers they have to use their systems in the future.

Further, such outages could dampen their reputation and could subject them to potential litigation and liability damages for these outages and lost data.

• Finding and Retaining Employees: Competition for the types of employees and sales force that SoundBite needs is intense in the AVM industry.

The skill-set needed to successfully sell AVM products and enhance product offerings is hard to come by, and thus SoundBite will always be in fierce competition with other providers for a capable workforce.

• Insider Lock-Up Period: The insider lock-up period for selling shares of stock in SoundBite on the open market will expire April 29th, 2008. At that time an additional 9.8 million shares will be eligible to trade on the open market.

I feel that insiders will be keeping their shares for a long time to come, especially with the low volume of shares trading in SoundBite’s stock, and also knowing that better days are ahead, but bear in mind this might put downward pressure on the stock in the coming months.

• Low Volume/Price Stock: SoundBite’ shares are very volatile and illiquid and will fluctuate wildly not only from day-to-day, but also within each day’s trading session.

This means you’ll have to contend with large bid/ask spreads, uneven trading volumes and manipulative market makers and traders that can push the price around whenever they want. Buyer beware!

Read my posting on large bid/ask spreads and how to protect yourself from getting screwed by the market makers.

• Other risk factors. Things like options scandals, margin deterioration, losing business, losing customers, increased costs, overall market volatility, etc.

Pretty much anything that can go wrong within a business is a risk factor, but the ones listed previously are the main risks to the business, with these being secondary, and possibly primary, risk factors going forward that all businesses need to worry about.

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V. Why I Invested In the Company

• Established Large Player: SoundBite is among the leaders in their industry and poised to take over that leadership position as a result of their just completed IPO and cash-rich balance sheet.

There are no other publicly traded entities that compete directly in the niche that SoundBite does. Some companies offer competing technology like predictive dialers and some SaaS solutions that are public, but as far as focus and established presence go, there is no other company out there that simply does what SoundBite does, and focuses on that and nothing else.

In addition, SoundBite’s roster of customers (14 of the top 20 collections agencies) and expanding customer base, allows them to maintain that leadership position and build upon it through focus, reach and reputation.

• Fantastic, Highly Scaleable Technology: I went over this extensively elsewhere in this report, but suffice it to say that SoundBite’s Software as a Service (SaaS) technology along with the complete and expanding robust product offerings that they deliver, makes them a one-stop-shop for any customer service, customer retention, or other customer-centric program or campaign for any business, in any industry for any reason, at any time.

On top of this SoundBite is able to tie in their technology into any bookkeeping, accounting, or customer relationship management (CRM) software that other companies use. This reduces downtime, integration headaches and expenses, and allows clients to seamlessly integrate their technology into the SoundBite platform easily, quickly and without deploying extra software, hardware, or having to reconcile data that doesn’t fit into existing systems.

You can see where I am going here. Name a business that deals with customers. Then also name me a business that could NOT benefit from SoundBite’s technology.

Whether that involves allowing customers to make payments over the phone, calling customers to alert them about the status of their accounts, calling customers for collections or payment needs and a whole host of other applications that can be performed RIGHT NOW, and in the future as SoundBite expands their offerings.

Finally, because SoundBite uses the SaaS model, and a VoIP backbone for all their calling infrastructure, their business provides high margins, is highly scaleable and will allow them to enter other markets overseas in a cost-effective manner.

• Huge Growth In an Expanding and Rapidly Developing Market: As I have already presented, SoundBite’s industry niche is growing at about a 30% CAGR and is expected to do so for years to come.

On top of this, SoundBite is growing FASTER than the industry average and is poised to take a leap to the next level as they use their increasing funding to pry away new technologies, customer wins and ultimately, to acquire competitors and their technology and customers.

One more thing that I forgot to mention is that SoundBite itself is also ripe for a possible take-over. I don’t want to see that happen of course, as I feel that we could make way more money buying and holding the shares for years to come than any short term premium by a potential suitor, but that remains a possibility.

• Downside Protection in a Recessionary Market: The possible downturn in the economy can actually benefit SoundBite, as 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 current credit market turmoil and corresponding housing decline and recession fears plays right into the hands of additional collection needs.

Even when the economy does turn around, that’s when people start paying off their debts again, so a downturn in the economy will provide a boost for SoundBite not just in the immediate future but also for a sustained period of time.

• New Company on the Precipice of Fundamental Breakout: If you paid attention to the valuation metrics, margin trends and other financial data provided above, it doesn’t take long to see that not only is SoundBite trending higher in every major fundamental and valuation-wise way, but they are also gaining steam in ways that will lead to undervaluation by analysts. That includes increasing profit margins, net income, cash flow, etc.

I believe that analyst’s estimates are incorrect for the next 2 years, and as these expectations get shattered, SoundBite’s shares will trade much higher than they are today.

Let me put it this way: Even if analysts are dead on in their predictions for SoundBite for the next few years, shares are STILL undervalued at today’s levels by a large margin. Our risk/reward scenario is extremely advantageous right now.

Now how often do you get to say that about any company, let alone a company that just came public, has a large market opportunity with amazing growth prospects, and is in the early innings of that cycle?

Don’t say I didn’t warn you!

• Fantastic Stock Price as a Result of Pre-IPO Patent Letter: As I discussed above under the “Risk Factors” section, SoundBite was prepared to go public at $12-14 per share in early November.

As a result of the letter they received from URS alleging that they MIGHT infringe on an existing patent, and a potential patent application, investors were spooked, and SoundBite had to lower their IPO price, total number of shares being offered, and price per share to $8.

These fears were unfounded, and there NEVER was a case brought against SoundBite for patent infringement, and in fact SoundBite sued the offending party for essentially messing up their IPO and forcing them to lower the price to allay spooked investors’ fears.

Once again, market overreaction is on our side in a positive light, as we are able to get shares near $6.00 per share, almost HALF of what SoundBite thought they were worth before going public, for a company whose fundamentals, business prospects and outlook HAVE NOT CHANGED AT ALL!

From one day to the next in this whole saga, nothing changed except market perception.

Let’s use that to our advantage.

• Largely Underfollowed Stock With Low Volume: Some may see that as a detriment, but I see that as an opportunity.

You see, SoundBite’s average daily volume is VERY low. Some days it trades almost no shares at all! This is very scary for many large institutional players, and mutual fund buyers, as they can’t get into a stock with such a low trading volume and market cap.

This is where money is to be made! If you have ever looked at my investing style page, I explain this in detail.

It might take years for these types of stocks to gain enough momentum and popularity among the investing community to garner significant positions among various funds, but when they do finally start adding to their portfolios, and believe me they will as long as SoundBite maintains their business, when the shares do appreciate, it can happen very quickly.

We want to be in the stock BEFORE everyone else catches wind of this great company, not afterwards. Our goal is to CRUSH the market, and the only way you do that, is by finding undiscovered stocks with improving business trends, fundamentals, and a small market cap that precludes others from entering the stock in a large fashion.

Again, don’t say I didn’t warn you. Be patient, buy on dips, and then smile as you sit back and know you own a piece of an up-and-coming company that is poised to break out.

• High Margin Business: As mentioned before, SoundBite’s business model is purely on the Internet, and is delivered as an on-demand application. This keeps margins high, costs low, and service levels up-and-running on a continuing basis with no interruption of service for SoundBite’s clients.

• Multiple Revenue Streams: This is lower on the list for the mere fact that SoundBite produces essentially one product: AVM solutions.

However, it should be noted, that these service could be applied to many different industries, in many different sectors, for many different applications.

I like that diversity, and potential diversity going forward. SoundBite isn’t pigeonholed into one category, and is able to expand their offerings and services to meet the needs of any future client that came to them with any specific request.

• Large Insider Ownership: Although the CEO and other executive managers own less of SoundBite than I would like (about 6-7%), the total ownership via their directors and investing vehicles account for about 60+% of the total ownership of SoundBite’s stock.

This is one reason that the stock trades with very low volumes. There just isn’t that much stock to go around that isn’t being held by the original investors in the company.

That’s a good thing for us now and in the future. Now because it makes it harder for outside investors to garner a significant portion of SoundBite’s stock without moving the price too much, thus allowing us to get into this stock at a great price, and later because once market forces start sending the stock higher and volume does pick up, we’ll already have established our positions in the stock and can simply ride the wave as institutional investors come calling to a “hidden” undervalued stock that we have already been in.

It should also be noted that almost none of the original founders are with the company. Only their CTO Timothy Segall is an original founder.

Previously SoundBite had a different business model and business plan. Part of the agreement for getting more funding going forward, was that a new CEO and management team be brought in to capitalize on SoundBite’s technology, but take it in a different direction.

I am satisfied that the new management team is deeply entrenched and has the company’s best interests at heart, while also owning a significant portion of the company as well.

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VI. Bottom Line

The methodologies and techniques that I adhere to are designed to increase the chances that we find that special “10-bagger” stock and ride those gains to unprecedented returns in our portfolio.

Part of that thesis is patience, diligence and prudent risk taking.

We pounce while others are either scared, don’t know about the company we are investing in, or both.

Furthermore, when analyzing potential companies for inclusion into the PeakStocks.com portfolio, I also look for risk/reward scenarios that favor us in such a way as to minimize our downside risk, and allow us a cushion should the thesis take more time than planned to play out, while simultaneously protecting our portfolio.

If there was ever a time when all of these elements have presented themselves, it’s with SoundBite Communications.

You have a small company with a market cap under $100 million, sales growing over 35-40% annually, just came public, is largely ignored by the investing community at-large, is in a rapidly expanding niche, is a dominant player in that niche, and is offering us a compelling risk/reward scenario that makes our decision to put capital to work almost a no-brainer.

If there was ever a time that you were going to take a risk on a company for a small portion of your portfolio, SoundBite is that company.

Right or wrong, the compelling valuation and deep research and diligence with which I have attacked this company and their fundamentals, leads me to feel as confident as any investor can ever feel about any investment.

Furthermore, it doesn’t take a wild stretch of the imagination to see that SoundBite’s shares are invariably undervalued from not only a fundamental sense, but more so from a potential industry view, as the AVM market is poised for explosive growth going forward.

It’s not inconceivable that SoundBite could very well double in price within 1-2 years as more and more analysts and fundies begin “discovering” this great company.

It’s time to put some money to work in SoundBite, and then sit back and watch this little company grow.

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