Review of Technology Companies recently visited

Since 1994, Axel Merk has been attending an annual conference sponsored by the American Electronics Association hosting over 200 public small and medium sized technology firms.^[1] It is an intense three day event giving portfolio managers twenty 45-minute small-group sessions with the top executives of these high tech firms.

When we prepared for the conference, a striking difference from the past couple of years was that there were many more small companies of interest. In the second half of the 1990s, most firms that were somewhat interesting had reached very high valuations - and many well capitalized new firms never were "small firms" - at least as far as valuations were concerned (the conference defines small firms as those with less than $300m in market capitalization and revenues). The conference which had moved from Monterey to San Diego a few years ago because it was getting too large, will move back to Monterey next year - another sign that investment research in technology firms is going back to its roots.

We saw numerous companies, below are a some highlights:

Quovadx (Nasdaq: QVDX) Quovadx deploys and supports business-to-business software solutions for the health care industry. The day we attended, president and CEO Lorine Sweeney announced the acquisition of Rogue Wave Software. At the presentation, numerous analysts present were shareholders of Rogue Wave Software and complained that the acquisition price was too low. From the point of view of considering to buy Quovadx shares, we couldn't have been more pleased to get their direct endorsement that Quovadx management is prudent in its financial decision making. This is a company that had its IPO during the best days of the dot com boom, but who has been able to keep its CEO during the rough ride the B2B sector has experienced. We are likely to take small positions in select accounts; we also gain some exposure to the growth in the health care market without direct consumer exposure.

UTStarcom (Nasdaq: UTSI). Here's a company to get excited about. UTStarcom is best known for its PAS solutions, an IP based mobile wireless voice and data access network within a city or community. In simpler term's it's a poor man's mobile phone, priced as if it were a fixed line phone, i.e. a cordless phone service. Their historic growth rate is the dream of any 'dot com' company. Their focus is the developing world with China as their main market. The stock price has been under pressure lately because some analysts are worried about saturation and competition from G3 mobile phone carriers. We have followed the company for some time, and actually prefer the slower, more predictable growth if it eventually leads to reduced volatility in share price; we see G3 services as complementary, targeted at a different niche. UTStarcom has excellent knowledge of the region. We expect this to be a high risk investment for some time to come, but are likely to take a small position in select accounts in the near future.

Aspect Communications Corp (Nasdaq: ASPT) we attended Aspect Communications' presentation to learn more about how the Call Center market is evolving, especially with regard to outsourcing to India and other offshore centers. It turns out that Aspect has been pre-occupied getting its own house in order and has so far neglected these markets entirely. They are very much focused on their domestic customers; their plan is to move to India when their customers request it. In practice, many US companies sign contracts with local Indian companies; and those, in return, are not willing to pay the high licensing fees. We did not get the impression that Aspect was about to get ready for the new opportunities and challenges. Consumers are the ones who will suffer through this transition as the quality of the offshore center is improving. In an odd twist, consumers may actually prefer using automated and voice-activated systems while offshore centers are improving. We will keep an eye on developments, but not invest in the near term.

Scansoft (Nasdaq: SSFT), to most consumers known because of its Visioneer Paperport scanning software, is run these days by Stuart Patterson, formerly President & CEO of SpeechWorks. That's right, the paper scanning company nowadays "scans' voice - SpeechWorks is an integral part of Scansoft's product line which ranges from consumer scanning & optical character recognition software, their new PDF to word document converter, to ever improving high-end speech recognition systems. Interesting technologies; at "best", Patterson has found a good way to use other products as cash cows to finance his speech technologies; at worst, this company is moving in too many directions. We have no plans to buy shares in the near term.

Other companies we saw included OpenText, FileNet, Raindance, LivePerson, SPSS, Transmeta.

We went straight from the San Diego conference to attend Apple's (Nasdaq: AAPL) annual analyst day at their corporate headquarters in Cupertino. Analyst meetings for large companies are much more choreographed, and because of the larger audience, these meetings are mostly presentations of what companies like to show to analysts with limited time for true dialogue. Still, we were very impressed with the good understanding Steve Jobs and his teams have about their strengths and weaknesses, and how they are taking many of the right steps to build on numerous initiatives. Many analysts still try to compare Apple to the PC makers, whereas Apple has not only talked about its "digital hub" strategy, it has successfully transformed its business around it. Apple not only innovates aggressively, it positions new products and initiatives prudently. Apple's brand name is fast moving into the consumer space, and their offering in the growing digital audio-video market is unmatched. At Apple's traditional computer business, they play an aggressive and successful game - we believe Apple will benefit as the company continues to innovate while consumers and businesses slowly learn that their internet access, word processing, spreadsheets and presentation programs work just as well, if not better, on an Apple than on a PC. The hardware business is a tough business, but Apple has proven that it keeps its costs under control and is able to operate profitably in this harsh environment. We own Apple in select accounts and are slowly expanding positions where appropriate.

Please contact us with any questions.

Axel Merk
Merk Investments

Analyst Disclosure: Axel Merk, his family, Merk Investments as well as Merk Investments' clients are beneficial owners of:

These holdings are valid as of the above publication date of this newsletter; however this newsletter will not be changed to reflect upcoming transactions or changes in opinion.

[1] Disclaimer: Merk Investments, LLC, does not have experience managing investments preceding its SEC registration in late 2001 and relies on the expertise and prior experience of Mr Merk, who previously conducted his investment advisory activities from Merk Investments AG of Switzerland.

Disclaimer: This page contains links to service providers not affiliated with Merk Investments; Merk Investments is not responsible for information provided at these sites.

Please email us if you would like to be informed when a new newsletter is available.