Saturday, August 27, 2011

The Case for CounterPath

Updated:  5/3/2013


(CPAH, CCV.TO)


Abstract

The telephone industry is ripe for a dramatic makeover.   All calls will be routed through the internet, and new services like video calls will be available for anyone with a computer or smartphone.  CounterPath is well-positioned to provide the front-end or interface software, which is the software that sits on the computer or smartphone and conducts these new video internet calls.


CounterPath has also developed important system software.  The one-ID patent, which can ring muliple phones at once.  CPAH also developed software that will allow users to switch calls from expense cellular minutes to cheap internet calls at WIFI hotspots.


The reason why CounterPath is particularly well-positioned is because all the important telephone equipment providers have a relationship with it - Cisco, Alcatel-Lucent, Ericsson, Broadsoft, Metaswitch, Avaya, and Genband.


Salient Points



1)  CounterPath, CPAH, makes telephone video apps to run on computers and smartphones for business (also called enterprises like Amazon and Citibank) and system operators (such AT&T, Sprint, and Verizon) which run over the internet, and the internet is the path where telephone service is going.  CounterPath already has apps which run on iPhone, iPad, and Android, and has already won awards.


The video telephonic capability for computers has been available for years.  CounterPath makes an industry-wide accepted version of the interface software (like Skype), but Skype is proprietary software, which will not inter-connect with the rest of the industry.

2)  Server software allows users at Wi-Fi hotspots to switch from expensive cellular minutes to cheap over-the-internet minutes.

3)  CPAH is starting up a network to connect video users of corporate networks to allow members of one network to call another.  Thus, employees of Amazon (a CounterPath customer) will be able to make video calls and "see" an employee at Citibank (another CounterPath customer).  A Skype network for business.

4)  Ownership closely held.  As of the last 10K, insiders own 57%.  Employees have options.  Everyone is motivated.

5)  Will not run out of money.  Sir Terry Matthews made a billion selling companies to British Telecom and Alcatel.  Fidelity Investments took $5 million (over 5% of the company) of the most recent financing.  

6)  Competitors have been eaten up by Google and Microsoft (see below).

7)  CounterPath's Bria is the defacto standard for telephone's front end for the enterprise.  It is the interface of choice.  Its award-winning technology is used by all the big vendors - Cisco, Alcatel, Ericsson, and Avaya among the older vendors, and Broadsoft, Metaswitch, and GENBAND among the newer competitors.   Telcos and enterprises are getting proposals that all use the same front-end (interface software) - CounterPath's Bria, in a distribution pattern internet telephone blogger, Andy Abramson, calls swarming,   When the major carriers finally upgrade their networks, CounterPath's Bria is may well be the standard for the entire industry.

8)  New sales will be driven by video for mobile - iPhone, iPad, and Android.  The iPhone app is available now with the others coming on stream in the next few months.  Although these apps are not available yet, they have already won awards.

9)  A basic review of the financials below show revenues going up and losses going down.  Though one would assume that expenses will go up to build the Skype for Business network.  (But also remember Skype went for $8.5 billion). 

10) Rogers, a Canadian wireless and cable provider with $12 billion in revenue, has announced its One Number service featuring CounterPath one number patents and video technology.  See promo here.  This will showcase their technology on a true telephone system, and should lead to additional sales.\

11)  Balance Sheet is strong.  No debt, $12.8 million cash, very slow burn rate (no burn in the prior quarter), the development work is done, and warrants may bring in some more cash in the next few months.

= = = = = = = = = = =

Liquidity Warning


There is no liquidity in the stock.  In the past year, trading has not exceeded 90,000 shares in any one day in America.  Many days it has not traded at all.  So, exit is difficult.  Investors must invest for the long term, either substantial profitability or buyout.   With the company only achieving break even in the most recent quarter of its eight years of its existence, substantial profitability appears a distant target.  Since a number of investors have large positions acquired in various fundings and can only cash out through a buyout, it would be safe to assume this is the logical goal of management.  Nevertheless, a conservative posture would require investors to assume a 3-5 year holding period.


= = = = = = = = = =


State of the Telephone Technology

All telephone calls will ultimately be routed through the internet.  This means that all telephone calls will become VOIP (voice over internet protocol) calls.

This was made abundantly clear when Verizon announced on January 10, 2009 that it would route all calls through the internet by 2016.  Ultimately, we believe that all phone telephone conversations will be routed over the internet.

This is an announcement considerable magnitude.  It means they will either cannibalize their present hardware, or convert what they have to internet traffic, through DSL lines, for example.  It is reminiscent of Intel when it would cannibalize one of their microprocessors when a new one came along.  They could have milked the old CPU for a year or two more, but they moved on. 

This vindicates the way forged by Vonage because it means that all its calls will be over the internet.



CounterPath Products and Services

Telecom Software

    User Endpoints – interface software for computers and cellular phones.

           The Bria software below is installed on a computer or cell phone very much like Skype.

            Bria
            Bria Android Edition
            Bria iPad Edition
            Bria iPhone Edition

    System Tools (Server Tools)
           
           Client Configuration Server - used by a system operator 
                         to configure endpoints (such as CounterPath's Bria)
           Network Convergence Gateway for Mobile Operators
           Network Convergence Gateway for Wireline Operators


The company has in the past supported operating systems such and Symbian, Linux, and Blackberry/RIM, and it may still have older software which still uses these operating systems, they are now supporting those with the largest following - Windows, iPad, iPhone, and Android.  Though it is clear that if important new operating systems get a big enough following, such as Windows8 for Mobile or RIM get a large following, they will develop applications for telephone which support those operating systems.


Telephone Network for Business (Enterprise)

This is the network that CounterPath is setting up to connect the various networks they have established individual businesses.  Thus, their customer Amazon will now be able to do video calls with Citibank.  This would be, in effect, an instant Skype-for-Business network. 

This network has never been formally announced, but it was mentioned in a company blog (see below, The Evolution of X-Lite).  The network may be called X-Lite Connect.  X-Lite is a free product, a prior version of their flagship Bria software.  Facts:  500,000 downloads per month by December of 2009.  So, if it has continued at this rate, that would be 6 million downloads for 2010, and another 3 million in 2011.  Since this product has been out there since 2006, there must be at least 10 million downloads of the software on computers.

After the network is established, it could be expected that the company will monetize it with perhaps at first yearly charges, but perhaps ultimately monthly charges.  


Company History

2002 Incorporated

2004 Xten Networks acquired, which developed video softphones

2007 NewHeights acquired, sales of enterprise telephone solutions

2008 FirstHand acquired

Fixed Mobile Convergence (FMC) solutions from FirstHand will enable Counterpath carrier and enterprise customers to deploy an integrated solution that extends communications from the personal computer to most major mobile devices.

2008 Bridgeport acquired

Technical discussion:  BridgePort Networks is a leader in providing mobile convergence enabling IP Multimedia Subsystem (IMS) and pre-IMS applications for a  variety of service providers. The company's Session Initiation Protocol  (SIP) open standards-based approach creates a seamless union between mobile  and broadband networks, allowing users to benefit from numerous advantages  such as single number identity regardless of the network they use.  BridgePort's innovative products include the MobileSTICK(TM) solution which  transforms personal computers into voice, SMS, Multimedia Messaging  Services (MMS) and video terminals for integrated broadband and mobile carrier services, leveraging standards-based VoIP and SIP technology. The  company's products, which also include the NomadicONE(TM) Network Convergence Gateway (NCG) and NomadicONE IMS Convergence Server (ICS), are backed by eighteen patents either pending or granted. Since 2002, over $50  million has been invested in the development and initial marketing of  BridgePort's intellectual property assets.

2008 Stock Consolidation, 5 shares exchanged for every 1 share



Financials



Revenues by Quarter


               Revenues      Income
           
04/31/04     232,848   
07/31/04     487,151   
10/31/04     677,364   
01/31/05     920,608   
04/31/05   1,037,754   
07/31/05     827,296   
10/31/05   1,086,101   
01/01/06   1,237,932   
04/31/06   1,467,850   
07/31/06   1,760,881   
10/31/06   1,672,793   
01/31/07   1,007,528    
04/31/07   1,283,739   
07/31/07   1,226,791  -1,211,237  
10/31/07   2,444,711  -1,782,643  
01/31/08   2,634,763  -2,719,273  
04/31/08   2,780,763  -6,009,597  
07/31/08   2,612,760  -5,835,352  
10/31/08   3,016,830  -6,576,385  
01/31/09   2,030,061  -2,519,932  
04/31/09   2,173,450  -4,725,415  
07/31/09   2,050,457     204,343  
10/31/09   1,900,607  -1,472,345  
01/31/10   1,363,418  -1,672,777  
04/31/10   2,702.375   1,052,942  
07/31/10   2,219,585  -1,647,266  
10/31/10   2,567,663    -829.570  
01/31/11   3,022,102    -435.563  
04/31/11   3,230,948       9,628   10K  
07/31/11   2,758,734    -972,775  
10/31/11   3,473,853    -254,774   
01/31/12   3,485,871    -150,456
04/31/12   4,365,038  -1,051,093   10K
07/31/12   4,387,768     706,972
10/31/12   3,562,787    -293,248
01/31/13   3,266,088    -163,582
04/31/13   4,023,280     -28,923   10K
07/31/13   2,859,487  -1,225,291

Revenues by Year

04/31/05   3,122,877 
04/31/06   4,619,179
04/31/07   5,724,941  -3,370,952
04/31/08   9,086,900 -11,722,750
04/31/09   9,883,101 -19,657,084
04/31/10   8,016,857  -1,887,835
04/31/11  11,040,298  -2,902,771
04/31/12  14,083,496  -2,429,098
04/31/13  15,239,923     221,219  


Recent Financing

CounterPath raised $3,597,000 U$S on June 19, 2012.  Probably this money was raised to satisfy requirements for a Nasdaq  listing

= = = = =

CounterPath raised $5,636,171 in a private placement on June 14, 2011.  Also, it appears the company received another $1,500,000 from the exercise of warrants.  It is likely that this money was raised to fund the equipment necessary to create the X-Lite network.


Fidelity Investments took a position in CounterPath.  If warrants are included, and it appears the warrants have been exercised, then Fidelity Canadian Growth Company Fund has 1,565,850 shares, and Fidelity Special Situations Fund has 2,214,150 shares.


http://www.sec.gov/Archives/edgar/data/1236997/000106299311003629/forms1.htm



Management


It is always a happy thing to see management with significant ownership.  The CEO and other officers have plenty of options, and management and closely held shares own a majority of the company, and the Chairman, Terry Matthews, is the kind of man investors like to see at the helm.

Terry Matthews is one of the few who has made a fortune in the network and telephone area, and he has a record of building and then selling companies.  He sold his first company, Mitel, to British Telecom.  And he sold Newbridge Networks to Alcatel for $7 billion, pocketing $1 billion for himself.  But it's important to remember that has a track record of investing in small telecom companies, and the number of deals is now more than 80.

Recent Terry Matthews deal info:  Bridgewater sold to Amdocs for $211 million (Canadian).  Ubiquity sold to Avaya for $145 million.  


Zarlink was bought for $632 million (9/22/11)


If you watch the videos below, Terry says his first big success was with Mitel, which made a hit in touch tone phones.  The problem was the receiving end of the tone signal.  He solved that problem and sold lots and lots of phones.  Oddly enough, here he is again decades later.  The touch tone phone became a handset became a softphone, a software interface and an endpoint.  With CounterPath he returns to his roots in the new state-of-the-art device which the user receives or makes his phone calls.  




Interview with CEO of CounterPath, Donovan Jones

BNN Interview Aug 09, 2012
Branham300 Executive Interview



Shares, percentage ownership (per most recent 10K)

Terence Matthews, COB      8,745,628 shares          22.5%
Covington Venture Fund     5,640,241                 14.5%
Steven Bruk                3,270,518                  8.6%
Owen Matthews              2,348,419                  6.2%
Donovan Jones, CEO           940,706                  2.4%
David Karp, CFO              507,095                  1.3%
Chris Cooper, Dir            118,760            
Larry Timlick                 80,659

Total shares above        21,652,026                 57.0%

= = = = = =

Total Outstanding         33,100,000 

Fully Diluted             41,300,000 



Patents

The software that CounterPath makes is from public sources, so-called open systems.  It is popular because there are few or no patents associated with it, making it cheap source code.  The value of CounterPath is that they are able to put such code together reliably that works.  It is one thing to have cheap software, and another to be able to make things work.  CounterPath has expertise, and expertise is important in systems because things have to work near faultlessly or they are useless.

But along the way, CounterPath has developed some server software, also called gateway software or network software, which gives added dimension to their interface software.  It is useful stuff for the corporations who are setting up their own networks. 

Transfer of Calls from Cellular Networks to Wi-Fi (or internet) at Hotspots

Data Network Computing Device Call Processing, 7,656, 864 - The new patent covers the use of a mobile device’s ID – specifically, its mobile number (MSISDN/MDN) – to enable seamless transition of voice, data and multimedia sessions across disparate fixed and mobile networks which may include transition:

From legacy, circuit-switched infrastructure to a network based on IP Multimedia Subsystem (IMS) standards; and from a 2G or 3G cellular network to an-all IP network, such as LTE, Wi-Fi or WiMAX (Feb. 09, 2010)


(see Fixed Mobile)

Single Number for Cell or Landlines

Circuit Switched Cellular Network to Internet Calling with Internet Antennas, 7,804,821 – assigning a single-number identity across muttiple devices and networks. (Sep 28, 2010)
(see Single Number)


This technology has been picked up by Rogers in Canada.  See promo of how the Single Number patent works.  www.rogersonenumber.ca


Presence - Knowing If a Party is Available, and Least Expensive Routing

Presence Detection for Cellular and Internet Protocol Telephony, 7,809,381 – “a graceful way to automatically select the best network connection based on the user’s location, the patented mechanism enables services such as least-cost routing and minimizes dropped calls by streamlining the process of transferring calls from the cellular macro network to Wi-Fi or femtocell.”


Platforms (operating systems)

The company’s website says it only supports Microsoft and Apple operating systems, but the 10K from prior years has also included Linux, Symbian, and Rim:

Windows 2000
Windows XP
Windows Vista
Mac OS X
iOS
Android


Customers

Counterpath makes most of its money from its customers who are re-sellers.  Cisco early turned up on a 10K as the largest of the re-sellers with 14% of CPAH's revenues.  But CPAH also sells direct to end-users in the enterprise market (i.e. they sell to large businesses who set up their own corporate networks), such as Amazon and Citibank, and it also provides to the system operators, such as AT&T and Verizon.  The list is stunningly all-inclusive, though there have been few complete deployments of its software.  Vonage, for example, uses their software, but video is absent.

Re-sellers (AKA Partners) to the Enterprise Market

Alcatel
Avaya
Broadsoft
Digium/Asterisk
Cisco
Ericsson
Genband (demo of CounterPath's iphone and Android apps here)
Huawei
Iskratel
Juniper
Metaswitch
Mitel
NEC
NTT
Polycom
Acme Packet/Oracle



Direct Enterprise Customers  (that is, businesses who bought direct from CounterPath)

Genesys (Alcatel)
Amazon
Bosch
Citibank
Coca-Cola


System Operators 


Most of the system operators are customers in name only, and few have made real deployments of the new VOIP products.  Rogers, in Canada, is one of the first sizable deployments of all of CounterPath's technology.

AT&T
Earthlink
Mobilkom Austria
PT, Portugal Telefonica
Sprint
Telmex
Verizon
Vonage, deployment
8x8, deployment
Rogers (Canada), deployment


Competition

It is hard to tell how many competitors CounterPath has.  Many of CounterPath’s customers have been acquired in the race to get this key technology:

Teleo – bought by Microsoft in 2005
Grand Central – bought by Google in 2007
Gizmo5 – bought by Google in 2009
Jajah - bought by Telefonica in 2009
GIPS – bought by Google in 2010
Mirial - bought by Logitech in 2011
Skype - bought by Microsoft in 2011


Mirial was bought in July 2011 by Logitech.  Note:  Mirial already has video for Android and iPhone/iPad, and others.  But their focus seems to be conferencing.

It is hard to make intelligent remarks about competition, but the article comparing VOIP systems at Wikipedia may be useful:  Comparison_of_VoIP_software


Potential Suitors

CounterPath has a spectacular list of customers that counts just about every important telephone company and telephone equipment supplier on the planet, which is why we claimed above that its interface is the de facto standard for the industry.  So, the first place to look for a potential suitor is among CounterPath’s 250+ customers:

Oracle becomes a possible buyer with its purchase of Acme Packet.  CounterPath has worked with Acme Packet on a couple of accounts, and Acme used CounterPath's Bria to showcase better-than-Skype performance.  We think that Acme used Bria at the Barcelona Conference in a collaboration with China Mobile.

http://www.fierceenterprisecommunications.com/story/acme-packet-teams-counterpath-take-skype/2013-02-21

Notice a day later, it is announced that Acme Packet is running a demonstration with China Mobile:  

http://news.acmepacket.com/articles/279977/acme-packet-together-with-china-mobile-enables-td-/

It is not such a stretch to believe that Acme Packet ran the demonstration on CounterPath's Bria.

Avaya/Silverlake is certainly possible.  Avaya bought Ubiquity, a server solution for SIP (softphones) from Terry Matthews, why not buy the client or endpoint or user software from Terry?  Silver Lake, which owns Avaya, also owned until recently Skype, so they would be aware of the desirability of owning a similar business telephone software.

Cisco was one CounterPath’s early big customers, and uses their software in their Unified Communicator.  They might prefer to own it than license services from whoever else might buy it.  But other suppliers could also want CounterPath, such as Alcatel, Broadsoft, Metaswitch, or GENBAND (which took over Nortel's client list.

There is a very good reason why one of  the Baby Bells or other carrier may get off square one and buy it – AT&T, Verizon, BT, Deutsche Telecom, Sprint, Telmex.  AT&T and Verizon will spend $18 billion apiece on capital expenditures.  AT&T's network has been busting at the seams since it brought out the iPhone.  Mobile video, which is coming on, will be another assault on its network.  Carriers may wish to divert traffic away from their 2G/3G networks and funnel that traffic through the internet at Wi-Fi hotspots to make the traffic over their mobile networks more manageable.  Or perhaps to delay or defer or curtail some of the capital expenditures.  If a Tier One carrier could defer $1 billion of expense, what would they pay to allow switching networks at Wi-Fi hostspots, to re-route traffic away from expensive new 4G networks?  $10 million per year?  $20 million?  $30 million?

It's possible a consortium of major telecoms might decide to buy it so as to assure reasonable access.  Apple recently led a syndicate to buy the patent portfolio of Nortel.  And Steve Jobs was toying with a Wi-Fi network for a couple of years, perhaps Apple might want the patent and the software.

But a buyer could come from out of nowhere.  IBM might decide it would like to be an important player in telecommunications, or Oracle, or Microsoft, or Google.  I don’t think it’s going to be an oil company or steel company, but many of the companies above just mentioned could easily manage an acquisition.


Target Stock Price


The overall dreary stock market has made the prospects for any stock rather gray, and this includes start-ups like CounterPath. 

That background comment made, the stock price target I believe will vary with the company’s progress.  At present, I do not believe management will settle for less than $10 per share.  This is the target price for a software company that could be used to outfit all of American telephone companies with video and additional internet services that can be made available cheaply by use of the internet.  This could be a low target price considering the size of the possible market, I failed to mention the international market, and their customers likely include far more companies outside America than inside.

It appears that CounterPath's build out of its X-Lite Connect network will serve initially to showcase their product.  While Skype is free, it is not likely this new service will prove to add much to the bottom line.  But it is important to note, free is not a profit model, and Microsoft is losing as much as $2 billion a quarter on its internet initiatives.  At some point Microsoft will throw in the towel, or start to charge for service.  When that occurs, CounterPath could make out very well.  But that could prove to be a long wait.  Microsoft is still generating very good profits even blowing $2 billion a quarter.  

However, when that changes, if only 1 million (out of a possible 10 million or more) paid $20 per year for the service, that would be $20 million, and it would triple revenues.  It would likely all fall to the bottom line, against 40 million shares, that would be $.50 per share.  If all 10 million took the service, that might be $200 million.  If 2 million took the service, that would be profits of $1 per share, which look pretty good for a stock selling not much above that.

There is the possibility that if the service is very well received, that CounterPath could begin charging like $20 per year for a service that is secure, and permits a bunch of enterprise connections that would be a hassle to duplicate on Skype.



Risk


No small technology company is without risk.  Our job as investors is risk reduction.  Here are the reasons why I think the risk is minimum:

1.     Terry Matthews, a telecommunications entrepeneur is the driving force and largest owner of CounterPath, has pockets deep enough to carrry it through to buy-out or profitable operation.  And apparently he is able to interest others - as per above, Fidelity Investments has a significant position. 

2.     CounterPath is in the sweet spot.  All telephony business is going to the internet (VOIP), CounterPath has the critical endpoint interface app VOIP software, and patented network software.

3.     Hard to tell how many competitors are in its telecom software space.  Many have been gobbled up.  It certainly seems like there are few competitors among publicly owned companies, though it is hard to gauge how many there are in the privately-owned sector.  And there is that World War I factor - The Firstest with the Mostest.  Meaning that it would a new competitor a while to establish that its software is carrier reliable.  Basically, "carrier reliable" cannot fail.  CounterPath's product has been tested over and over, and is well-established in the internet area.

4.     The company as of 5/3/2013 has a market cap of $77.54 million (Yahoo).  Tiny, tiny, tiny.  Think compression.  The patents alone might be worth that.

5.     It is hard to decipher how much has been invested in this technology, but Bridgeport invested $50 million.  FirstHand and CounterPath have invested tens of millions more.  Think compression.

Discussion:  It could be argued that Microsoft way overpaid for Skype.  That Ebay couldn't get it to work and wrote off most of its exposure, that Skype's software is proprietary, and therefore, not very valuable because no one else will use it. That its architecture which is based on nodes and the use of its subscribers' computers will ultimately turn off possible users and buyers.  And in the end, Ballmer is not a tech guy, doesn't understand what he is doing, and that this will be more of the stuff that Microsoft will deep six when revenue streams for tablets exceed PCs, and MSFT finally has to face realities.  And so this would be an argument against a high value for CounterPath.  

But CounterPath is a software company first and foremost.  It is the most important vendor of the open systems SIP telephone architecture that Big Business is using and that Big Telephone will subscribe to.  That it is nearly making a living selling systems to the enterprise market, and the systems operators have still done virtually nothing, and will need such expertise.



CounterPath Signs Software License and Distribution Agreement with
NTT Software (10/31/2012) - CounterPath's main business has been setting up enterprises with
their own networks.  In this agreement with NTT, Nippon Telegraph and Telephone, which is the
largest phone network in the world, will pay CounterPath royalties for enterprises it sets up with
CPAH's software.  I take this to be a money announcement.

Zacks #1 Rank Additions for Monday (09/24/2012)

AT&T and Verizon Are Progressing in Transformation to
Data Transmission Utilities (06/19/2012)

CounterPath Announces Softphone.com (03/26/2012)

Bria for iPad Wins British Award for Most Innovative Product (03/22/2012)

Stock Buyback (02/16/2012)

Bria Wins Awards for iPhone, iPad and Android apps (01/09/2012)

Rogers One Number Beta  (12/20/2011)

Rogers Wireless "One Number" Launch - Upping the Stakes  (12/14/2011) 

Now all the iPhone needs is a decent SIP softphone client (09/22/2011)

Rise in VoIP networks prompts enterprise softphones adoption  (09/28/2011) 

Facebook Is to LinkedIn As Skype Is to CounterPath Corp.  (08/03/2011)

Why the Major the Telecoms Are in Trouble (06/29/2011)


Updated:  05/03/2013
Updated:  11/12/2012
Updated:  04/13/2012
Updated:  03/31/2012
Updated:  01/09/2012
Updated:  12/20/2011
Updated:  12/14/2011
Updated:  12/07/2011
Updated:  12/02/2011

Friday, July 22, 2011

The Internet and Telecom Acronym Dictionary

Endpoint - an internet telephone interface for computer, devoted VOIP phone, or mobile phone with internet access.

EMG - Enterprise Mobility Gateway.

FMC - Fixed Mobile Convergence

IM - Instant Messaging (text messaging)

iOS - iPhone Operating System, Apple's smartphone operating system

ITSP - Internet Telephony Service Provider

MNO - Mobile Network Operator

MVNO - Mobile Virtual Network Operator

NCC - Network Convergence Gateway

OEM - Original Equipment Manufacturer

Over-the-Top - data applications offered through the basic internet service, or pipe.

PBX - Private Branch eXchange - a telephone exchange service that serves a private company, as opposed
           to a common carrier.

Pipe - Internet cable

Presence - service that detects whether a person is on the telephone or not.

SDK - Software Development Kit

SIP - Session Initiation Protocol, VOIP software for endpoints

SMB - Small to Medium-sized Business

SME - Small to Medium sized Enterprise (business)

SMS - Short Message Service (text messaging)

UC - Unified Communications

URL - Uniform Resource Locator, an internet address

VOIP - Voice Over Internet Protocol

WCC - Wireline Call Continuity.  From counterpath.com "Enables users to move
             a call from their desktop or mobile VOIP phone to another device,
             including their standard mobile phone or smartphone."

Tuesday, December 7, 2010

Recent Trends in Telecommunications Favor a Tiny Firm Called Counterpath

The important trends in telecommunications are these:  the wholesale move to internet architecture, the next is to mobile communications, then texting, and finally to video telephone calls.  One could argue the order of importance, but if all calls become internet calls, then I say the move to the internet (called VOIP - voice over internet protocol) is the first order of importance.  Then the numbers demand you name mobility next, then texting (an outgrowth of messaging), and finally video telephone calls are coming on stream.

On January 10th of 2009, Verizon (VZ) announced it would be routing all calls through the internet within seven years.  This was the seminal announcement that signaled the end of the way telcos had been transmitting calls to an inevitable move to the internet, which began when engineers figured out how to send a voice signal through the packet network of the internet.  It is a technology that has been perfected over the past fifteen years, and will surely be picked up by all telephone companies in the coming decade.

Vonage (VG) was an early adopter of internet telephone service, and it conducts its business as a normal telephone company, charging all of the taxes that regular telephone company is obligated to collect.  But because they are sending their signal over the internet they are able to include for no additional charge all domestic long distance and calls to over 60 countries, while AT&T (T) is still charging a monthly fee just to get a lower rate for domestic long distance, and yet another monthly fixed charge for lower international rates.  Vonage, which does not offer video yet, is presently previewing the transcription of voice messages to text, which is very handy and puts them again in the vanguard, but video must be in their thoughts what with Skype coming on with a free preview of what video calls will be like.

Video phone calls, which were first showcased by AT&T in the 1960s, finally became a reality with the internet this past decade, when the substantial bandwidth capability of the internet allowed the processing of the huge amounts data necessary to transmit streaming images became available.  Indeed, AT&T offered such a product again this past decade called CallVantage, but never promoted it, and then deep six-ed it.

Skype swooped in to take advantage of the new video opportunity (which was AT&T's to lose), and now news programs and game shows use Skype to connect with individuals, reporters and experts instead of AT&T.  So far, these Skype-to-Skype video telephone calls cost nothing with Skype customers enjoying a tax free status not unlike that of Amazon customers.  How long such a status can continue with governments at all levels desperate for cash is debatable.  And whether free service is a profit model that will work for telephones is also in question.  If the profit model were that great would eBay (EBAY) have unloaded the biggest part of their ownership of Skype?  And so that's why I am calling Skype's video calls a preview.

While Skype has a product for the masses, Cisco (CSCO) is showcasing a premium video conference product which Alec Baldwin appeared to mock in 30 Rock, and which appeared to dazzle Ellen Page as she talked to her doctor in Denmark in Cisco commercials.  This conference product takes full advantage of its router capability, and it is certainly in Cisco’s interest to pursue these video products, because video telephony is a bandwidth hog requiring lots of their routers and equipment.  And Cisco, along with Juniper (JNPR), will be big winners as the nation's networks move over to the internet.  But Cisco also wanted video on an individual basis for their business customers everyday use (to sell even more routers), which they called their Unified Communicator, and that brings us to the focus of this piece.

Now comes a tiny company (market cap $58 million) from Vancouver, Counterpath (CPAH, CPAH.OB), which was originally focused on the endpoint technology, called a softphone, meaning a software telephone, configured with your computer's microphone, speakers, and camera, or it can be just an ordinary phone plugged into your internet router (there's Cisco again).  And voilĂ : you have an internet telephone.  This technology of Counterpath's is used by AT&T, Verizon, Sprint (S), Vonage, plus British Telecom (BT), Deutsche Telecom, and over 300 other companies.  (With such a large customer base, it is hard to imagine a buyout offer coming from any source other than that list.) 

Over time, Counterpath has moved from the endpoint (the phone) back to the server to provide these interesting possibilities:

A Single Number for your Cell Phone and Land Line.

The internet will allow a user to have a single number for both cell phones and land lines, and to able to tell whether the intended receiver of a call is occupied or not.

A Seamless Handoff from your Wifi Internet call to your cell phone network when you leave the hotspot.

A most striking innovation, for which they were recently awarded a patent, includes a hand-over technology which allows a mobile user to take advantage of a wifi hotspot where calls become cost free over the internet yet if the user leaves the hotspot, the call seamlessly transfers to the user’s cell phone network.  And vice versa, if a user comes to a hotspot, the software lets the user know that he can transfer the call to the hotspot.

Counterpath has rolled back to endpoints (the cell phone) to coordinate its new server technologies with a program (its app) for the Android and iPhone, with Blackberry (RIM) to come.  As a telecommunications provider, white label versions will be coming out for its customers.
 
The company announced that it also has the capability of permitting computer users to send text messages to cell phones and vice versa.

This handy invention has not appeared on the scene in any numbers yet, but this capability alone will be quite important and lucrative.

Now we return to Cisco and their Unified Communicator.  It turns out that tiny Counterpath is the technology behind this product, and Cisco has been CPAH's largest customer.  And sure, I am recommending Cisco as well as Counterpath, but it is a modest recommendation.  Cisco is now a GDP company, a mammoth company that cannot experience the growth that a tiny company like Counterpath can.  This was made clear recently when Cisco said in its quarterly report that they expect sales growth to be modest because state governments are ordering less due to the downturn in the economy.  That's a GDP company.  Counterpath will not be subject to Cisco constraints as I expect demand to come on like a freight train.  No, demand will be unrelenting like a freight train for sure, but it will also be explosive, perhaps not in a destructive way, but more like a flowering spring green explosion after a terrible boring winter.  The major telcos will all be moving their infrastructure to the internet, and customers will be demanding all the services they can now get because the majors have moved to internet - lower overall costs, dirt cheap long distance and international calls, texting to and from their computers, lower cell phone bills (at least when they're in a hotspot), one number for all their phones, and seeing the other party (video). 

The important investor in the company is Canadian/Welsh billionaire, Sir Terry Matthews, who has invested in start-ups in networks and telecoms for many years with over sixty deals.  He came across the Counterpath, which one of his companies was doing business with, and recognized its potential.  To Counterpath's expertise in VOIP and video, he merged with two other companies adding mobility and texting.  He has funded the shortfalls in revenue of this development company, but he will also be the big winner here.  As he is fond of saying, one of the keys to his success is timing.

And timing is why this company is so attractive.  Although the company is hopeless about transmitting its story, there is a story, and that story is that they sit at the crossroads of the great trends in telecommunications – the move to the internet, the move to cell phones, to texting, and the move into video.  They are certainly in the sweet spot, and with their patent portfolio, possibly in the catbird seat.

The bulk of the shares in this company are in closely held hands, so potential buyers should be aware that the company trades erratically, and could move volcanically (up or down).

But this much is for sure:  investors wanting to travel downstream in telecommunications with the current at their back will want to invest in Counterpath.