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We believe Oracle is fairly valued. Oracle is a successful software and IT services company, which has exhibited strong growth, fuelled by an aggressive acquisition-driven strategy. It is a multibillion company with a strong brand name and large customer base. However, the company has been relying on acquisitions for its growth and faces very strong competition, represented by such industry giants as Microsoft, IBM and SAP. The latter is a leader in many business software segments and is developing its own set of SOA tools, an area heavily targeted by Oracle. However, unlike Oracle, SAP has reported strong organic growth and is in no position to give up its market share. Currently, Oracle has built a strong portfolio of companies, but it will need to consolidate them efficiently, recovering the margins that suffered in the past two years. It will also have to make an effort at pushing organic growth to rates comparable with SAP's to keep and gain market share.

• Company size
• Wide range of products
• Expansion into industry subsectors through acquisitions
• Oracle leads in many market segments
• Fusion Applications scheduled for release in 2008
• Aggressive business strategy
• Partnerships with industry leaders
• Sound financials with healthy balance sheet
• Positive guidance provided by management for Q3FY07.... more

Risks:

• Company size
• Strong competition
• Relative security weakness of Oracle databases
• Fast expansion and tight competition have eroded Oracle's profit margins.... more

Industry highlights

• Enterprise resource planning (ERP) applications market: Oracle is the fastest market share gainer
• Business analytics software and data warehousing tools market: Oracle is the market leader
• Worldwide relational database market (RDBMS): Oracle is the market leader
• Customer relationship management (CRM) software market: Oracle is much closer to the leading position after the acquisition of Siebel
• Application integration and middleware (AIM) market: Oracle has the strongest momentum in the segment.... more

Contact: research@gempick.com

The Web 2.0 Phenomenon
The last few years have witnessed a new trend in the virtual world of Internet. Following the standalone personal and corporate websites that picked up in the 1990s, the internet users have embraced a new community – the online one, where they can interact with a large number of people and where they can together contribute to the creation of new content and share it with others, being both the users of information and its producers. A big wave of social networking sites hosting huge volumes of user-generated content (UGC) currently represents “the next big thing” in online business.

This phenomenon even has its own “hi-tech” name: “Web 2.0”. According to the Wikipedia, the term “Web 2.0” refers to “a perceived or proposed second generation of Internet-based services – such as social networking sites, wikis, communication tools, and folksonomies – that emphasize online collaboration and sharing among users”.

Obviously, the sheer outreach of websites like MySpace, Blogger , Classmates Online , YouTube , MSN Groups and others suggests that these websites hold a huge potential for profits. A number of deals shook the market in the recent years, such as the purchase of MySpace by the News Corp. for $580 million in 2005, or the purchase of YouTube by Google for $1.65 billion in November 2006. Obviously, the acquiring companies must have big plans for these websites.... more

Potential Revenues
Because social networking websites bring together whole communities through the use of technology, the online world increasingly resembles the real life: people chat to each other, create and post images, music and videos, shop around, ask for advice and look for dates. This represents a whole new world that is waiting to be used by businesses to generate revenues. Let’s see what possible sources of revenue exist for such website owners:

1. Obviously, advertising, which at the moment is the biggest revenue source for social networking websites, and is not likely to give up its importance. This can come in several shapes, beginning with the annoying popup ads and ending with content-sensitive search-based advertising. Currently, the most promising ad types are the ones based on content... more

Main challenges
It appears that the exact reasons that made social networking sites extremely popular with users are making it very hard to earn big profits for website owners. The main reasons are:

1. Most notably – User Generated Content (UGC). Users are encouraged to post text, audio and video content to be viewed by other users. Obviously, many users post content that belongs to others and is protected by copyright laws, or alternatively – they create their own content based on existing works (such doing video makeovers, remixes etc.) As a result, this creates a lot of illegal content and no advertiser will want their ad to be displayed on a page which contains such illegal material.

2. Lack or censorship. Users are allowed to .... more

Conclusions.
So, the big question remains: can MySpace and its peers be turned into multibillion revenue sources? Experience of News Corp. suggests that it is not as easy as it seems. On the other hand, Google’s acquisition of YouTube suggests that there may be some aces up Google’s sleeve and it will somehow overcome the huge copyright issues YouTube faces. However, to actually turn tens of millions of users into hundreds of millions of dollars will take more than putting an extra banner here and there.

Among the possible solutions may be... more

ANALYST OPINION: We initiate coverage of Smith Micro Software Inc. (SMSI) with Neutral rating and a fair value of $14.7 per SMSI share.

POSITIVES:

• Sixth consecutive quarter of record top line and bottom line results. Sales doubled yoy in Q3FY06 and tripled yoy in 9mosFY06 while EPS almost flat yoy for Q3FY06 and almost double yoy for 9mosFY06.
• Decreasing share of operating expenses in total revenues during the last several quarters, however the positive impact on earnings completely offset by decreasing gross margins.
• Return to a more normalized growth trend for broadband QuickLink Mobile connectivity product.
• Significant growth of Music Essential kit, specifically with Verizon Wireless, benefiting from a strong marketing push and launch of the LG VX8500 Chocolate phone.
• QuickLink Music product launched during Q3FY06.
• Management sees StuffIt Wireless program continues progress on track, with several ongoing prototypes in testing with large handset manufacturers, and a wireless carrier.
• Management optimistic about business outlook, expecting continuation of growth, and believing the recent music success can continue to grow with the launch of QuickLink Music.
• Aggressive acquisition strategy: Allume Systems, Inc. brought in June 2005 and PhoTags, Inc. in April 2006.
• Debt free balance sheet with a cash balance of more than one half of total assets [Q3FY06 end]. However, the largest part of current cash balance was received from issuance of common stock during FY05.
• Huge and surging market: according to Gartner, mobile phones sales of one billion units per year will be reached in 2009 and there will be 2.6 billion mobile phones in use by the end of 2009.

RISKS:

• High revenue concentration: largest SMSI's customer - Verizon - accounted for more than 71% of net revenues both in H1FY06 and H1FY05.
• Unfavorable changes in the revenue mix: significant sales of the lower margin Music Essentials Kits in 2006 had a negative impact on consolidated gross margin which decreased from 83% [9 MOS FY05] to 61% [9 MOS FY05].
• Extremely competitive and dynamic market: SMSI is a relatively small player in the markets that are extremely competitive and subject to rapid changes in technology.
• Almost 3 million stock options outstanding [>10% of current number S/O] at an average price of $4.56 as of H1FY06 end.
• The effective income tax rate was under 3% level during several recent years. However we expect the operating loss carryforwards to be consumed by 2007-2008 leading to a normal effective tax rate.
• Large insider sales during the recent several months.

[Investment Research Report]

ANALYST OPINION: We downgrade Cantel Medical Corp. (CMN) to Neutral rating on termination of operations of its Carsen subsidiary on July 31, 2006. This termination will have a major impact on CMN's earnings since Carsen accounted for about one quarter of consolidated net sales and almost a half of consolidated operating income during 9moFY06.

INVESTMENT PERFORMANCE: CMN's stock price declined by 23.0% since we had assigned a Buy rating in July 25, 2005. [Investment Research Report]

ANALYST OPINION: We downgrade one of our worst performing stock picks, Hi Tech Pharmacal Co. Inc. (HITK), to Neutral rating on worsened operating performance as well as the risk of HITK failing to meet its revenue guidance for the current fiscal year. 

In July 2006 Hi-Tech Pharmacal announced that it expects FY07 revenues to increase between 5% and 15%, a growth rate under our estimates as well as below the grow rates reported for the last several years. 

Later, in September 2006 HITK reported a 27% yoy drop in sales for the Q1FY07 blaming (1) lower unit sales of cough and flu products due to a weaker than usual season compared to a stronger than normal season in the prior year, as well as (2) pricing pressure on several higher margin products. Significant decrease in margins was imminent for such a drop in sales and as a result HITK swung to losses in Q1FY07. While company reiterated its sales guidance of 5% to 15% growth for FY07, we believe there is a risk of HITK failing to meet its FY07 guidance.

INVESTMENT PERFORMANCE: HITK's stock price declined by 48.8% since we had assigned a Buy rating in November 25, 2005. [Investment Research Report]

ANALYST OPINION and VALUATION: Coverage initiated with Buy rating and a price target of $75 per share. [Analyst Estimates]

HIGHLIGHTS:

• Accelerating double-digit revenue growth since 2003 driven by both price and shipment increases.
• Increasing profitability despite large decline in TEL business
• Gradually improving balance sheet
• Strong operating cash flow
• Diversified business portfolio
• Demanded products and recognized brands
• Marketing strengths 
• Positive growth perspectives
• Expansion focused strategy
• Positive sentiment supported by large insider buys. [Investment Research Report]

• Technological innovations
• Macroeconomic conditions
• Changes in regulations
• Increase of raw material prices
• Foreign operations risk [Investment Research Report]

ANALYST OPINION: Coverage initiated with Buy rating.

VALUATION: Based on DCF, P/E and P/S valuation we have derived a fair value of $21 per share of ZVXI (28% above current price). [Analyst Estimates]

HIGHLIGHTS:

• Technological expertise, experience and extensive product portfolio.
• Technological leadership and compliance with industry standards.
• Strategic Reorientation of business towards profitability.
• Revenue growth combined with increased profitability.
• Stable demand for complementary products.
• Distribution strength.
• Growth expected to continue.
• Expanding Enteral Feeding Market.
• Successful patent infringement claim. [Investment Research Report]

• Increasing dependence on a limited number of customers.
• Increasing revenue dependence on one product segment.
• Small market share and established competitors.[Investment Research Report]

ANALYST OPINION: We downgrade Escala Group Inc. (ESCL) to Neutral rating on recent news about alleged fraud involving collectible stamps.

INVESTMENT PERFORMANCE: ESCL performed extremely well since our initiation of coverage, more than doubling in just 2 months. Unfortunately, yesterday ESCL lost more than half of its value on news that Forum Filatelico and Afinsa (67% owner of ESCL) were being investigated for crimes including fraud and money laundering. In our opinion this event and coming lawsuits significantly cut the prospects of ESCL; therefore, we downgrade ESCL to Neutral rating.

ANALYST OPINION: We downgrade ViroPharma Inc. (VPHM), to Neutral rating.

INVESTMENT PERFORMANCE: After a spike of over +120% since our initiation of coverage, VPHM was seriously punished for it undiversified revenue base. In March 2006, VPHM has been informed by FDA that the agency may waive certain drug trials measuring bio-equivalency for a potential generic product. After this announcement VPHM's shares dropped on fears that lead drug Vancocin could be facing generic competition sooner than expected. Moreover the Q1FY06 results reported yesterday are below our expectations. We downgrade VPHM to Neutral rating and also drop coverage due to increasing analyst coverage on this stock.

ANALYST OPINION: We downgrade USG Corp. (USG), to Neutral rating.

INVESTMENT PERFORMANCE: USG's stock price jumped by 229.0% since we had assigned a Buy rating in February 4, 2005, providing THIRTEEN times higher investment return potential compared with RUSSELL 2000 INDEX. Despite excellent performance, we downgrade and drop coverage of USG Corp. (USG) mainly because it is much out of our small cap focus.

ANALYST OPINION: We downgrade Overseas Shipholding (OSG), to Neutral rating.

INVESTMENT PERFORMANCE: OSG's stock price declined by 16.2% since we had assigned a Buy rating in February 4, 2005.

ANALYST OPINION: We downgrade (PRLS) to Neutral rating on lower than we expected guidance for FY07.

INVESTMENT PERFORMANCE: PRLS's stock price gained 23.3% since we had assigned a Buy rating in November 25, 2005, providing two times higher investment return potential compared with RUSSELL 2000 INDEX.

ANALYST OPINION: We downgrade one of our worst performing stock picks, PainCare Holdings Inc. (PRZ), to Neutral rating on uncertainties related to its financial reporting as well as effectiveness of its acquisition strategy.

INVESTMENT PERFORMANCE: PRZ's stock price declined by 36.5% since we had assigned a Buy rating in November 25, 2005.

ANALYST OPINION: We downgrade Art Technology Group (ARTG), one of our best performing stock picks, to Neutral rating based on valuation.

INVESTMENT PERFORMANCE: Since we assigned Buy rating to ARTG in November 2005, this stock provided an excellent investment gain potential of 99.3%. Despite fundamentals remain solid, we believe that at current levels the stock is fairly valued.

ANALYST OPINION: We downgrade our worst performing stock pick, DHB Industries Inc (DHB), to Neutral rating.

INVESTMENT PERFORMANCE: DHB's stock price declined by 45.9% since we had assigned a Buy rating in July 25, 2005.

ANALYST OPINION: Buy rating maintained. We believe CAS is still undervalued. Since 2004, CAS has reported strong operating improvements including: solid revenue growth, breakeven and a steady rise in operating net margin, decline in indebtedness level.

INVESTMENT PERFORMANCE: Since we assigned Buy rating to AM Castle & Co. (CAS) on November 25, 2005, its stock price jumped by 47%.

VALUATION: Based on DCF, P/E, and P/S valuation we have assigned a price target of $39.2 per share of CAS, or 32% above current price. [Analyst Estimates]

HIGHLIGHTS:

• Strong revenue growth in FY04 (+40% yoy) and 9moFY05 (+30% yoy) after almost flat sales yoy in FY03.
• CAS broke even in FY04 and continues to report a solid improvement in operating margin (+6.9 percentage points in FY04 and +3.2 percentage points in 9moFY05).
• CAS continues to report a decreasing indebtedness level and recently refinanced its long-term senior secured notes.
• CAS has a well diversified customer base and large distribution network.
• In December 2005 Chairman and CEO of CAS announced it expects strong end-markets in 2006.
• In January 2006, CAS replaced Mr. G. Thomas McKane with Mr. Goldberg - new President and CEO to “lead A. M. Castle into its next phase of development”.
• Main risks: business performance vulnerable to economic cycles and weak internal control as mentioned by auditors.[Investment Research Report]

ANALYST OPINION: Downgraded to Neutral rating.

INVESTMENT PERFORMANCE: FLI's stock price increased by 13.9% since we had assigned a Buy rating in February 2005. We assign a Neutral rating to FLI mainly on concerns about high stock volatility and decreasing trading volume.

ANALYST OPINION: The best stock pick downgraded to Neutral rating.

INVESTMENT PERFORMANCE: JLG's stock price jumped by 184.3% since we had assigned a Buy rating less than one year ago. Despite the excellent recent performance, we consider the current stock price already reflects the turnaround JLG executed over the last 2-3 years and we expect future upside potential to be limited.

ANALYST OPINION: Assigned Buy rating. We believe ALDILA Inc. (ALDA) is undervalued. For the last several years ALDA has reported strong operating improvements including accelerated revenue growth followed by breakeven and a steady rise in net margin.

VALUATION: Based on P/E, EV/EBITDA and P/S valuation we have derived a price target of $40 per share of ALDA or 55% above the current price. [Analyst Estimates]

HIGHLIGHTS:

• Accelerating revenue growth due to the introduction of co-branded shafts and continued success in the branded segment.
• Steady improvement in gross margin due to favorable changes in the revenue mix and economies of scale.
• Strong growth in operating margin fueled both by higher gross margin and limited growth of SG&A expenses.
• Solid bottom line boosting cash flows.
• Potential acquisition target for major industry players.
• Number one shaft brand.
• Golf equipment industry is currently witnessing a recovery after a strong decline in 2002. [Investment research report]