Sangoma Technologies and the Future of Telco

I own many shares of Sangoma Technologies (STC symbol) and have been wondering lately how the increasing use of Skype and the growth of Google mobile would impact the voip products of companies such as Sangoma and Digium.

So I emailed the CEO of Sangoma and got a reassuring answer. (I've omitted the personal comments including in our email).

I wrote to David Mandelstam;

ME: I'd like to ask you a question that I've been worrying about for a while. I don't understand how the growing use of Skype (now even in many small businesses) will impact on Sangoma. People who use skype have no need for sangoma products, right?

DM: Sangoma's role in Voice over Internet Protocol (VoIP) like Skype is that we provide a connection from the VoIP system to the plain old telephone system (POTS) that has been round for decades. Whenever you do a Skype Out call to someone not on their computer, you go through a gateway to the POTS. In some situations, you may be making the call through a Sangoma card!

VoIP is sexy and in the news, but as you know from Skype not every call is reliable. The most successful VoIP systems use voice on a network inside the office, where the line quality is controlled. These systems use the POTS for calls outside the office because it is reliable and has high voice quality. That kind of system is where you will find Sangoma products.

As long as the public switched Telephone network (PSTN) is around, there will be a need for Sangoma products.

The huge opportunity for us is that traditional PBX systems are being replaced by PCs running voice s a software service. All of these systems need PSTN POTS gateways, and we have a very powerful set of unbeatable advantages in that space.




ME: Thanks much for your answer to my question. But what I'm worried about is that people will increasingly be calling each other computer to computer. And the voice quality for Skype is much better there, is that correct? They will bypass POTS altogether. So in this situation, Skype is a direct competitor to Sangoma right? There would not be any reason for a Skype person doing computer-to-computer calls to need Sangoma products?

I realize that such a scenario may take years to develop, but with the rumour of Google purchasing Skype, or partnering with them, this scenario may be much sooner than we think?

DM: There is no question at all that packetized voice over data networks, like Skype, is the wave of the future. Paradoxically, it is the reason I think we will do well.

As a relatively small niche player, it is hard for us to compete with Microsoft's Office Communication Server or similar offerings from IBM, Nortel etc. These guys are concentrating on the gee-wiz aspects of unified communications and they will certainly be duking it out in the marketplace.

However all these systems need access to the PSTN at least for the next decade or two, probably much longer, and this requirement is right under their radar. We don't care who wins in the war, we just care that we can be there to meet their PSTN needs. I put my bets on Microsoft, but that is irrelevant.

PC to PC communication is wonderful, and we use it a lot in our business. We have 6 hour video conferences with a colleague in Sydney, for instance. But even I use Skype and other VoIP services sparingly for business, and the call is very often Skype Out to an ordinary phone.

You are right in that one of the promises of VoIP is improved quality. As you say, a good Skype-to-Skype call is magnificent. A bad Skype-to-Skype call is just impossible. And you never really know which one you are going to get.

We don't have to be a $5Billion company to do well by you and ourselves. We know that for the next 15 years at the very least, we will have a very attractive market, one that by rights we should be very successful in.


ME: Thanks much for your comments about this.

Mine is Not a Diversified Portfolio

About a year ago, I re-allocated my portfolio and placed over 85% of it into just two stocks. I don't really believe in the theory that a diversified portfolio is the best strategy. At least not until my portfolio is big enough that I'm happy with lower growth in return for possibly more safety.

For now, I'm looking for high growth. So I chose the two stocks carefully. One a large cap, and one of the largest companies in the world, and trading around $500, the other, a tiny company with under $15 million in annual revenues and trading for around $1.20 per share.

The first stock is Google. Google seems like one of the very safest stocks out there, yet it also delivers high growth, no debt, lots of cash on hand (9 billion) and an increasingly non-US-based revenue base (over 50% this year). Over the year, I've watched it climb to $747 per share and then take a sharp nosedive to under $450. But I feel very safe owning this stock. Their quarterly numbers are due this Thursday (April 17) and I think the results will reassure everyone that growth in online advertising is not stalling anytime soon. The stock is trading many times cheaper than Yahoo (P/E and PEG wise) but is a greatly superior revenue model.

The second company I threw all my savings in is a tiny one - Sangoma Technologies (STC.CVE). Like Google, they are growing quickly (and still much faster than Google at this early stage), have no debt, have lots of cash on hand, and have an incredibly low P/E ratio given their growth rate and near-term prospects. Their stock has also been pounded down from a very short-term high of about $1.70 last year to about $1.25 today. But this stock is completely under the radar, no one seems to know about it. There are no funds looking at stocks with a market cap of under $50 million, so this stock trades very sparsely but continues to show astoundingly pleasing growth rates each quarter.

Recently, with the rumor that Google may be talking to Skype about a partnership and buyout, I got to wondering how this would impact on Sangoma's business. So I emailed the CEO of Sangoma, and he was very kind to answer me.

Google and the DoubleClick Drag

The European Commission will decide tomorrow (November 13th) if it will allow Google to acquire DoubleClick.

Google Inc. (NASDAQ:GOOG) stock has been in free fall for the past four days. It has dropped over $100 from a high in the 740's to a current price in the 630's.

This has been a very bad few days for the technology sector in general. After surpassing all other industry categories by a handsome margin this year, the techs are being cut down to size. Google's drop has been equivalent or less in percentage to other key tech players such as Apple, Baidu, RIMM, AMZN and Cisco.

But the stock seems clearly undervalued compared to these other players. It is only trading at less than 32 of 2008 P/E levels. And those forecasted P/E levels are bound to be upgraded as Google looks set to grow earnings at least 45% next year over this year but analysts are still estimating a growth rate of only about 32% next year.

So why hasn't there been huge buying activity on this great dip in the stock price?

My guess is that the answer to this will come in tomorrow, Tuesday the 13th.

This is because this is when the European Commission makes it's decision on the Google Doubleclick deal. And it is by no means certain they will approve the acquisition. In fact, it is quite likely they will either decline or else ask for a four month extension on their deliberations.

This is why Google has not gotten much buying support over the past three days. The smart money is waiting for the ruling. They know if the decision is negative for google they will be able to pick up the stock at an even cheaper price tomorrow. Perhaps even $50 cheaper.

The price activity of the stock almost makes me think that some of the smart (insider) money are already privy to the decision. And they know it won't be good news for Goog.

As an investor in Goog I was afraid this might happen. And I deliberated selling a chunk of my shares a few days before the ruling. But i decided not to because in the larger scheme of things I don't think being denied DoubleClick will slow down the Goog very much and I didn't want to get off the train for fear I wouldn't be able to climb back on again. In the short term (maybe just a few days) it will further drag down the stock price some more but overall this engine of the internet economy is not going to be hurt too much by the absence of DoubleClick in its asset pile.

Google's Growth and P/E Ratios

Google revenues didn't grow as fast as I had expected in the last quarter. But I'm still convinced the slowdown in their growth rate is a temporary breather, as they ramp up their various markets. This quarter will probably surprise everyone. I'm looking forward to their earnings release on October 18th.

Here's the best analysis I've seen on the web so far for why this stock is undervalued. Jason of Investor Geeks says Google is actually a value play. Here's his excellent hypothetical calculation;



GOOG 2006 EPS: $10.58
EPS Growth: 20%
EPS in 10 Years: $65.51 (This is simply calculated by compounding our starting EPS by 20% for 10 years)
Average PE: 32 (Or more specifically what we can expect the PE to be in 10 years.)
Future Value: $3,078.90 (Simply the future EPS x the future PE)

This assumes Google's EPS will only grow at 20%. I'd be surprised if actually averages less than 35% annually over the next five years.

See his full discussion about Google is a Value Play here.

Google Anaylyst Estimates and Q2 Earnings

There are over thirty top analysts who follow Google and make estimates about future earnings.

Have they all fallen asleep for the summer and left us with what could be the biggest estimate-to-actual earnings discrepancy in the history of Google's growth story?

The next earnings report will be released on July 19th. And the analysts are expecting lower earnings than in the preceding quarter.

The Q1 '07 earnings were $3.68 dollars per share. The analysts had underestimated this number by about 10%. And now they are collectively saying Q2 '07 earnings will be only $3.56 a share. Correct me if I'm wrong but this is probably the first time the analysts are not projecting a quarter over quarter earnings increase for Google.

Why would they come up with such a figure?

It's true that Google's growth rate has slowed down over the past five years. It's also true that the second quarter is typically one of duller growth in searches and advertising outlays. Most of the action, when it comes to Internet activity, traditionally occurs in the 4th and 1st quarters.

According to industry reports, online advertising has been relatively flat in this quarter. But these reports are increasingly irrelevant. As an example, do you think they talked to my neighbor about her ad spending this quarter? Not likely. These reports are based on surveys given to Madison Avenue type agencies. Yet this is not where the biggest growth in online advertising is occurring. The really booming growth is in tiny businesses buying ads online.

My neighbor runs a part-time wedding videography business. She tried advertising with Google ads for the first time a couple of months ago. She spent $300 per month and was amazed with the stellar results and how many new clients it has contributed. She will be a loyal Google AdWords customer for the rest of her business life, and will be sending at least $3,500 to Google every year.

My hairdresser, dentist, doctor and plumber have yet to try it. But they are losing out. They are wondering why no one is finding them in the yellow page directories any more. The local restaurants, pizza and Greek food takeout have caught on and are competing vigorously for first search page ads. The others in my city will catch on soon.

Because I know personally of a couple of businesses who have tried Google ads for the first time this quarter I have a hunch that this is not just happening on my block of the world. Local search for goods and services is getting going in earnest now and this growth curve is only in its infancy.

That together with the major deals Google has signed in the past few months, beginning with the YouTube acquisition last fall, is bound to ramp up the growth curve and will begin to be reflected in this quarter's revenues. How many page views a day from around the world for YouTube? YouTube just started placing contextual ads on their site this quarter. How big will these revenues be?

iGoogle, the customizable front search page was released halfway through this quarter. It has been a home-run, surprising and amazing even Eric Schmidt. This will likely be another substantial overall boost for Google ad views. Most of those cute front page widgets come attached with tempting Google ads. How many teeeny boppers and more sophisticated viewers can you see clicking on them?

The Google BBC partnership has also been in full swing this quarter for the first time. I see Reuters has also had Google ads on each of their pages (for the first time?) this quarter.

And we are not even mentioning the tremendous potential of the Apple iPhone and Salesforce partnerships and the proposed DoubleClick buy. These will probably not show in the revenues until Q3 and Q4.

I'm very long on Google stock. July 19th will be an exciting day.

So what do other people think? Could the financial analysts possibly be underestimating Q2 earnings by a huge percentage this time? Could actual earnings per share be as high as $4.5 this quarter?



Here's a summary of analyst estimates via Yahoo Finance.

Earnings Est	Current Qtr Jun-07	Next Qtr Sep-07	Current Year Dec-07	Next Year Dec-08
Avg. Estimate	3.56	3.72	15.12	19.25
No. of Analysts	32	32	33	31
Low Estimate	3.35	3.39	14.45	17.68
High Estimate	3.78	4.13	16.05	20.48
Year Ago EPS	2.49	2.62	10.58	15.12

Revenue Est Current Qtr Jun-07 Next Qtr Sep-07 Current Year Dec-07 Next Year Dec-08 Avg. Estimate 2.66B 2.86B 11.32B 15.38B No. of Analysts 32 31 32 31 Low Estimate 2.59B 2.73B 10.97B 13.85B High Estimate 2.74B 3.00B 11.81B 17.31B Year Ago Sales 1.67B 1.86B N/A 11.32B Sales Growth (year/est) 59.5% 53.2% N/A 35.9%

Earnings History Jun-06 Sep-06 Dec-06 Mar-07 EPS Est 2.22 2.42 2.92 3.30 EPS Actual 2.49 2.62 3.18 3.68 Difference 0.27 0.20 0.26 0.38 Surprise % 12.2% 8.3% 8.9% 11.5%

EPS Trends	Current Qtr Jun-07	Next Qtr Sep-07	Current Year Dec-07	Next Year Dec-08
Current Estimate	3.56	3.72	15.12	19.25
7 Days Ago	3.56	3.72	15.12	19.25
30 Days Ago	3.40	3.58	14.31	18.40
60 Days Ago	3.40	3.58	14.25	18.43
90 Days Ago	3.39	3.58	14.25	18.42

Google Apple Partnership Rumors are Building

Apple's iPhone will hit the stores on June 29th. Is there a top secret announcement that will accompany the launch? I think so. And a lot of other people are speculating about this. We may see a Google Apple partnership that could be a big blow to the future of Microsoft.

See some discussion about this here and here.

Here's a comment someone left on the above post that sums it up very well;

Everybody's missing the point. If Apple succeeds in making the 'widget' the standard app delivery service for cell phone usage, then they can succeed in delivering the first mass-market entirely web-based computing platform. That is huge. iPhone widget development will become the whole game. Now Google apps also have some hardware to live on where they (hopefully) get adopted as a new standard for document exchange. If it works, then Microsoft is no longer anywhere in the picture of the future of personal computing devices and of the most innovative channels of software delivery. This is going to be very interesting...

First TV Station Deal with Google

A television operator has just signed a deal with Google to place their content on YouTube and share advertising revenues with Google.

Hearst-Argyle Television has local stations in Boston, Manchester, N.H., Sacramento, Calif., Pittsburgh and Baltimore. They will post local video content to dedicated YouTube channels.

"This innovative deal with Google and YouTube fits perfectly within our overall digital strategy of distributing our content on all three screens - the TV, the PC and the mobile phone," Terry Mackin, executive vice president of Hearst-Argyle, said in a statement.

Is this the door opening to the floodgates of other TV stations around the world who will start to see the benefits of such a deal with Google?

Google TV is here.

Google's Next Big Growth Market

The next big leap for Google in terms of revenue growth potential is most likely their soon to be released Nasdaq-like auction system for banner and video advertising. People know that Google bought DoubleClick a few weeks ago but most people don't realize that DoubleClick had been developing this ad auction portal. When Google bought them they already had 40 major online publishers and ad buyers testing the system and were planning on releasing it later this year.

This new way wave of online advertising will be radically different from Google's current search-based ads.

In this new model Google will sit more on the sidelines. It is an even purer way of bringing advertisers and publishers together. Google will only get a small percentage commission on each ad buy. But the ad buy will be completely independent from Google's search and partner sites. The ad can be seen on any site in the world and neither the publisher nor the ad buyer needs to have an Adwords or Adsense account.

This has the enormous implication in that Google will no longer necessarily need to rely on their dominance in the search space. Of course they will want to continue to gain market share in the search space, but this opens up a whole bigger world of revenue possibilities.

Most of the largest advertisers, the ones who typically advertise on TV or in the big newspapers have been slow in moving their ad budgets over to the Internet. Their online budgets are still typically much less than 10% of their total ad spending. These guys are not enamored with little search and keyword 'Ads by Google'. They want to go big; they want to go glossy; they want to brand in style.

In the last couple of years we have been seeing more flashy banner and video ads by some of these biggest advertisers. And many of them were signing on with DoubleClick to place these ads within the DoubleClick network of large online publishers.

But this Nasdaq-style ad auction system will be so much more interesting to them. Basically now they will be able to bid on banner or multi-media ads on any site. This could include the absolute biggest sites such as The BBC, CNN, The New York Times, Forbes, and People Magazine but it could also include the leading sites that appeal to a specific niche they are after. There will be no middle man in their way. There will be no Doubleclick to tell them that most of these sites are not available in their network roster.

Likewise, the top 20,000 publishers online are sure to sign up for the auction ASAP. Let's not forget that many of the top 1,000 (or even 20,000) websites do not choose to have Adsense ads on their pages. But in this new marketplace, they will see instantly who is bidding to place ads on their site and how the action is heating up. And they can choose to put in a minimum price and only accept ads if they pay it.

What is so addicting with Google Adwords - the very instant ability to have your campaign appear within minutes to a targetted audience - may be even more addicting with this new ad auction system. Here the market is wide open for all to see and all to participate. And there are no delays or compromises as to where you want your ads to appear. The key rule is only that the ad space goes to the highest bidder.

I've always wanted to own Google stock {Nasdaq: GOOG) and I've bought some. Their growth prospects seem enormous yet the forward P/E ratio is only about 26.

Nstein: Another Search Engine Upstart

I came across a little company called Nstein Technologies recently. Their one year technical chart looks very promising, so I bought a few shares.

They've developed a search engine that employs semantic analysis software. For example, if someone wants to do a search such as "What investments have American companies made in European companies over the last three years?". the Nstein search engine can find very relevant results.

You can imagine what kind of irrelevant results would come up if you typed this into Google or Yahoo or MSN Search. These engines "would generate countless hits only based on keyword matching and requiring a great deal of time and effort to sift through."

Nstein has been working with IBM recently to help release the OmniFind Yahoo! Edition search engine. Their other blue chip clients include Time Magazine and the BBC.

This seems like a small gem of a company that could be bought out soon by one of the big search engines or maybe even more likely, one of the big traditional media companies.

Why would big media be interested in Nstein? Here's a clue from an interesting interview from earlier this week with their VP;

Mario Girard., the president and CEO of text-mining maverick Nstein Technologies Inc., predicts newspapers will survive in the future, but will be entirely custom-printed.

To accomplish this, the media will need a special tool to organize and index their content quickly so they can be sent to the right subscribers and offer more relevant ads.

This is where Nstein's semantic analysis software comes in. It reads through tonnes of data and creates a neat summary of it: what it's about, how important it is, and what's related to it.

"Nstein is the closest technology to the human brain when it comes to understanding text," Girard said.

Of course, since I now own a few shares, I'd love to see a bidding war take place soon. Their market cap is only at about $20 million now and sales are about $10 million a year. See the most recent news about Nstein Technologies and their stock chart here.

MAMMA Search Engine Mania

Mamma is a search engine from way, way back. They went public in the dot com frenzy and have been reduced to almost nothing since the dominance of Google, Yahoo and MSN in search engine land.

But today they had a huge run-up in the stock market. MAMA on Nasdaq almost doubled, going from 2 dollars and change to over four dollars. What's up with Mamma.com?

I remember using Mamma a few times back in the late 1990's. They call themselves "The Mother of all Search Engines", which was a cute slogan back then but is a bit of a joke now. Like DogPile, Mamma goes out and combines search results from the other main search engines using their own quirky little formula.

The reason the stock took off dramatically today is because they've just announced they now offer video search capabilities.

What most people don't really understand about this press release, though, is that they've partnered with another company on this, and it is that second company that actually owns the video search engine.

This other company, Pixsy, has developed the "Pixsy Media Search Platform" and it seems that this is just a case of Mamma licensing with them for the right to use it on their site. The Pixsy video search could thus be used by any site that arranged a similar deal with Pixsy.

So it seems that the really interesting company to watch here is Pixsy; not Mamma.

Pixsy runs their own video search site. They are a small private company. They don't reveal much about themselves on their website. Here is their entire About Us page;

We believe that images are more powerful than text and have developed a unique search engine that delivers only visual results, in the form of thumbnail images. We call this "visual search".

Pixsy collects visual material from thousands of providers across the web, resulting in millions of photos and videos for you to search and browse. Traditional image search engines take a mathematical approach to search, with the focus entirely on relevancy. With Pixsy, you can search for both photos and videos by relevance, category, provider or freshness.

As a meta-aggregator of visual material you can explore content from multiple providers with just one search query. Additionally, our visual search technology extracts photo and video content from RSS feeds, enabling us to deliver the freshest photos and videos to our users (browse the latest news photos, the latest sports photos, the latest celebrity photos, the latest funny videos, etc). We update our index to the minute so you can discover new material every time you visit.

Pixsy enables any website to run their own branded photo or video search engine, with their own content (if desired), at no cost. Media search engages users, create new traffic, and unlocks new ad inventory. For more information please visit our Partner section.

Our goal is to collect, index, and organize the millions of photos and videos being added to the Internet each day.

About Pixsy Corporation
Pixsy Corporation is a next-generation media search engine and private-label photo and video search provider with offices in San Francisco, CA and Seattle, WA. Pixsy owns and operates www.pixsy.com, a web-based visual search platform that powers private label image and video search engines for online publishers. According to Nielsen//NetRatings, image search is the fastest growing vertical search category on the Internet today. Pixsy was founded by a team of engineers and business leaders hailing from Microsoft, Sony, and ValueClick.


I happened to buy some Mamma stock yesterday, because it looked really good technically. But I sold it too early today, because I thought this news was not that significant to raise the value of the company substantially. However, I think I was very wrong about this. This story may get immense press coverage and that alone will raise Mamma's profile and may prompt many people to start using them as their search engine of choice. And there could be more news here to explain the rise in Mamma's stock price today. It's quite possible another company is looking to buy them out.

It was smart of Pixsy to license with Mamma. Mamma still ranks as the 2,700 most visited web site according to Alexa. This will make a very interesting story for Big Media to report on, and will greatly increase Pixsy's exposure and clout.

Does anyone know more about them and their video search capabilities? I think we may be hearing a lot more about Pixsy soon.

The next big leap for Adsense revenues

Google may be a multi-billion company, but they are still extremely agile. With a bit of tinkering in their code, they still have the potential to more than double their revenues overnight.

As it stands now, often the ads you see on a page are not really relevant to the subject or to the reader's interests.

Google does not yet use 'flow tracking' but it's likely they will soon unroll this. Flow tracking will enable them to serve ads that are based on an analysis of what other pages the user visits. This will make ads much more relevant to the reader and should more than double current click-through rates.

I've seen very little discussion about Google's flow tracking capabilities, but the first big hint that this is coming soon is a German interview at Spiegel magazine (about Google's YouTube acquisition) with Google's Philipp Schindler. See the English summary here.

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The photo above is by jurvetson

Google Blasts out the Video Ads

We'll begin seeing a lot more video ads on our favorite sites soon. By Christmas they will be almost everywhere we go online.

Google has just introduced their astounding new video advertising arsenal. In the same space where you now see text or image ads, you will soon be seeing videos.

About a year ago, when Google started talking to the big Madison Avenue ad agencies, everyone was guessing they would begin competing in the placement of TV ads for their clients. These speculations were headed up the wrong tree. The Internet is the only future of TV and this video push will finally make that clear to everyone.

Google is starting the video campaign with only a handful of high profile advertisers. The key beta partner is Saturn, a division of General Motors. If you happen to live in one of the cities where this is being geographically tested, you will see Saturn video ads if you are searching for a keyword that is even remotely related to making a new car purchase.

You can try this out now, if you live in Buffalo, Dallas, Harrisburg, Indianopolis, Las Vegas or Raleigh. The ad zooms you from a view of the earth and flies you directly into your local Saturn dealership where the general manager introduces himself and gives you a tour of the new car.

You can bet the Madison Avenue agencies are drooling about the prospects. For all the Fortune 500 companies who continue to dedicate most of their ad budget to tv and newspapers we can expect to see a major migration given the very sophisticated and targetted video options now available to them.

Basic video banner ads have been around for a while. But they haven't been based on a contextual, keyword search system. The new contextually and geographically unique Google ads are about to revolutionize the advertising industry once again.


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Art by Christina Qualiana